NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Sparsity-Based Model of Bounded Rationality

Xavier Gabaix

NBER Working Paper No. 16911
Issued in March 2011
NBER Program(s):   AP   EFG   LE   ME

This paper defines and analyzes a “sparse max” operator, which is a less than fully attentive and rational version of the traditional max operator. The agent builds (as economists do) a simplified model of the world which is sparse, considering only the variables of first-order importance. His stylized model and his resulting choices both derive from constrained optimization. Still, the sparse max remains tractable to compute. Moreover, the induced outcomes reflect basic psychological forces governing limited attention.

The sparse max yields a behavioral version of two basic chapters of the microeconomics textbook: consumer demand and competitive equilibrium. We obtain a behavioral version of Marshallian and Hicksian demand, the Slutsky matrix, the Edgeworth box, Roy’s identity etc. The Slutsky matrix is no longer symmetric: non-salient prices are associated with anomalously small demand elasticities. Because the consumer exhibits nominal illusion, in the Edgeworth box, the offer curve is a two-dimensional surface rather than a one-dimensional curve. As a result, different aggregate price levels correspond to materially distinct competitive equilibria, in a similar spirit to a Phillips curve. This framework provides a way to assess which parts of basic microeconomics are robust, and which are not, to the assumption of perfect maximization.

download in pdf format
   (746 K)

email paper

This paper is available as PDF (746 K) or via email.

An online appendix is available for this publication.

This paper was revised on May 27, 2014

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16911

Users who downloaded this paper also downloaded these:
Gabaix w17783 Boundedly Rational Dynamic Programming: Some Preliminary Results
Almlund, Duckworth, Heckman, and Kautz w16822 Personality Psychology and Economics
Bordalo, Gennaioli, and Shleifer w17761 Salience in Experimental Tests of the Endowment Effect
Caplin and Martin w17163 A Testable Theory of Imperfect Perception
Bomfim and Diebold w5482 Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us