NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Behavioral Implications of Rational Inattention with Shannon Entropy

Andrew Caplin, Mark Dean

NBER Working Paper No. 19318
Issued in August 2013
NBER Program(s):   TWP   EFG

The model of rational inattention with Shannon mutual information costs is increasingly ubiquitous. We introduce a new solution method that lays bare the general behavioral properties of this model and liberates development of alternative models. We experimentally test a key behavioral property characterizing the elasticity of choice mistakes with respect to attentional incentives. We find that subjects are less responsive to such changes than the model implies. We introduce generalized entropy cost functions that better match this feature of the data and that retain key simplifying features of the Shannon model.

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Document Object Identifier (DOI): 10.3386/w19318

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