Neighborhood-Based Information Costs

Benjamin M. Hébert and Michael Woodford

No 26743, NBER Working Papers from National Bureau of Economic Research, Inc

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: D83 G41 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-ore and nep-ure
Note: ME TWP
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Citations: View citations in EconPapers (5)

Published as Benjamin Hébert & Michael Woodford, 2021. "Neighborhood-Based Information Costs," American Economic Review, vol 111(10), pages 3225-3255.

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