Neighborhood-Based Information Costs

Benjamin Hébert and Michael Woodford

American Economic Review, 2021, vol. 111, issue 10, 3225-55

Abstract: We derive a new cost of information in rational inattention problems, the neighborhood-based cost functions, starting from the observation that many settings involve exogenous states with a topological structure. These cost functions are uniformly posterior separable and capture notions of perceptual distance. This second property ensures that neighborhood-based costs, unlike mutual information, make accurate predictions about behavior in perceptual experiments. We compare the implications of our neighborhood-based cost functions with those of the mutual information in a series of applications: perceptual judgments, the general environment of binary choice, regime-change games, and linear-quadratic-Gaussian settings.

JEL-codes: C70 D11 D82 D83 D91 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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Working Paper: Neighborhood-Based Information Costs (2020)
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DOI: 10.1257/aer.20200154

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