Rational Inattention: A Review

76 Pages Posted: 22 Jun 2021

See all articles by Bartosz Maćkowiak

Bartosz Maćkowiak

European Central Bank (ECB)

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Mirko Wiederholt

Sciences Po

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2021

Abstract

We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to pay attention to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model.

JEL Classification: D8

Suggested Citation

Maćkowiak, Bartosz and Matějka, Filip and Wiederholt, Mirko, Rational Inattention: A Review (June 1, 2021). ECB Working Paper No. 2021/2570, Available at SSRN: https://ssrn.com/abstract=3871534 or http://dx.doi.org/10.2139/ssrn.3871534

Bartosz Maćkowiak (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Mirko Wiederholt

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

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