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The cost of information

Luciano Pomatto, Philipp Strack and Omer Tamuz

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Abstract: We develop an axiomatic theory of information acquisition that captures the idea of constant marginal costs in information production: the cost of generating two independent signals is the sum of their costs, and generating a signal with probability half costs half its original cost. Together with a monotonicity and a continuity conditions, these axioms determine the cost of a signal up to a vector of parameters. These parameters have a clear economic interpretation and determine the difficulty of distinguishing states. We argue that this cost function is a versatile modeling tool that leads to more realistic predictions than mutual information.

New Economics Papers: this item is included in nep-mic
Date: 2018-12, Revised 2019-02
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