Coordination with Rational Inattention

Ming Yang
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Ming Yang: Princeton University

No 1331, Working Papers from Princeton University, Department of Economics, Econometric Research Program.

Abstract: We study information acquisition in a coordination game with incomplete information. To capture the idea that players can flexibly decide what information to acquire, we do not impose any physical restriction on the set of feasible information structures. Facing an informational cost measured by reduction of Shannon's entropy, players collect information most relevant to their welfare and are rationally inattentive to other aspects. When coordination is valuable and information is cheap, endogenous and flexible information acquisition enables players to acquire information that makes efficient coordination possible, but also gives rise to multiple equilibria. This contrasts with the global game literature, where information structure is less flexible and cheap information leads to unique equilibrium with inefficient coordination. This distinction results from the difference between the flexible information structure of our approach and the rigidity implicitly imposed on the information structure of global game models. We also provide a clear and intuitive condition for the emergence of multiplicity in terms of the relative magnitude of strategic complementarity and informational cost.

Keywords: coordination game; endogenous and flexible information acquisition; rational inattention; information theory (search for similar items in EconPapers)
JEL-codes: C72 D82 D83 (search for similar items in EconPapers)
Date: 2011-08
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Citations: View citations in EconPapers (4)

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