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Bayesian Games with Rationally Inattentive Players

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  • Rongyu Wang

Abstract

We study how scarcity of attention affects strategic choice behaviour in a 2-player incomplete information entry game. Scarcity of attention is a common psychological character among population ( Kahnemann, 1973 , Attention and effort , Prentice Hall), and it is modelled by the rational inattention approach introduced by Sims (1998 , Carnegie-Rochester Conference Series on Public Policy, 49 , 317–356). In this game, players acquire information about their private payoff shocks at a cost, which follows a high-low binary distribution. We find that high information cost can generate multiple equilibria, and the number of equilibria differs with respect to different ranges of information cost. The number of equilibria could be 1, 5 or 3. Increasing the information cost could encourage or discourage a player to choose entry in some equilibria. This depends on whether the prior probability of high payoff shocks is greater than a given threshold value. We also exhibit a necessary and sufficient condition of parameter specification such that with the same set of parameters satisfying this condition, both the rational inattention Bayesian game and a Bayesian quantal response equilibrium game where the observation errors are additive and follow a Type-I extreme value distribution can have a common equilibrium. JEL: C72, D91

Suggested Citation

  • Rongyu Wang, 2023. "Bayesian Games with Rationally Inattentive Players," Journal of Interdisciplinary Economics, , vol. 35(2), pages 139-171, July.
  • Handle: RePEc:sae:jinter:v:35:y:2023:i:2:p:139-171
    DOI: 10.1177/02601079221083491
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    References listed on IDEAS

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    1. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-298, January.
    2. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
    3. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    4. Yang, Ming, 2015. "Coordination with flexible information acquisition," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 721-738.
    5. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bayesian games; rational inattention; strategic substitutes; information cost; quantal response equilibrium;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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