Behavioral Implications of Rational Inattention with Shannon Entropy

Andrew Caplin and Mark Dean

No 19318, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D83 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-exp and nep-upt
Note: TWP EFG
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