Rational Inattention via Ignorance Equivalence
Abstract: We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming existing techniques both in terms of speed and accuracy, and offering robust predictions on the most frequently implemented actions.
File(s): File format is text/html https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2020/wp20-24.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2020-06-22