Geometric Rational Inattention

Roc Armenter, Michèle Müller-Itten and Zachary Stangebye ()
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Roc Armenter: Federal Reserve Bank of Philadelphia

No 1062, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We demonstrate that a wide class of Rational Inattention (RI) problems can be re-cast as a set of geometric orthogonality conditions. This approach allows us to separate the role of information costs and payoffs from that of prior beliefs. It also allows us to characterize the optimal conditional choice by what we call the ignorance equivalent action (IEA) of a menu. We use the IEA to derive novel comparative statics for changes in the menu. Finally, it serves as the foundation for our new, highly efficient numerical algorithm for the solution of these models: Our algorithm provides accurate solutions orders of magnitudes faster than current techniques.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1062

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