The Status Quo and Belief Polarization of Inattentive Agents: Theory and Experiment

Abstract

We show that rational but inattentive agents can become polarized, even in expectation. This is driven by agents’ choice of not only how much information to acquire, but also what type of information. We present how optimal information acquisition, and subsequent belief formation, depends crucially on the agent-specific status quo valuation. Beliefs can systematically update away from the realized truth and even agents with the same initial beliefs might become polarized. We design a laboratory experiment to test the model’s predictions; the results confirm our predictions about the mechanism (rational information acquisition) and its effect on beliefs (systematic polarization).

Keywords: polarization, beliefs updating, rational inattention, status quo, experiment

JEL Classification: C92, D72, D83, D84, D91