Optimal Attention Management: A Tractable Framework

Abstract

A well-intentioned principal provides information to a rationally inattentive agent without internalizing the agent’s cost of processing information. Whatever information the principal makes available, the agent may choose to ignore some. We study optimal information provision in a tractable model with quadratic payoffs where full disclosure is not optimal. We characterize incentive-compatible information policies, that is, those to which the agent willingly pays full attention. In a leading example with three states, optimal disclosure involves information distortion at intermediate costs of attention. As the cost increases, optimal information abruptly changes from downplaying the state to exaggerating the state.

Keywords: information disclosure, rational inattention, costly information processing, paternalistic information design

JEL Classification: D82, D83, D91