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Rational inattention when decisions take time

Author: Benjamin Hebert; Michael Woodford; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2019.
Series: Working paper series (National Bureau of Economic Research), no. 26415.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Decisions take time, and the time taken to reach a decision is likely to be informative about the cost of more precise judgments. We formalize this insight in the context of a dynamic rational inattention (RI) model. Under standard conditions on the flow cost of information in our discrete-time model, we obtain a tractable model in the continuous-time limit. We next provide conditions under which the resulting  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Benjamin Hebert; Michael Woodford; National Bureau of Economic Research,
OCLC Number: 1125341871
Notes: "October 2019"
Includes online appendix (pages 45-95).
Description: 1 online resource (44 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 26415.
Responsibility: Benjamin M. Hébert, Michael Woodford.

Abstract:

Decisions take time, and the time taken to reach a decision is likely to be informative about the cost of more precise judgments. We formalize this insight in the context of a dynamic rational inattention (RI) model. Under standard conditions on the flow cost of information in our discrete-time model, we obtain a tractable model in the continuous-time limit. We next provide conditions under which the resulting belief dynamics resemble either diffusion processes or processes with large jumps. We then demonstrate that the state-contingent choice probabilities predicted by our model are identical to those predicted by a static RI model, providing a micro-foundation for such models. In the diffusion case, our model provides a normative foundation for a variant of the DDM models studied in mathematical psychology.

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