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Behavioral Implications of Rational Inattention with Shannon Entropy

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  • Andrew Caplin
  • Mark Dean

Abstract

The model of rational inattention with Shannon mutual information costs is increasingly ubiquitous. We introduce a new solution method that lays bare the general behavioral properties of this model and liberates development of alternative models. We experimentally test a key behavioral property characterizing the elasticity of choice mistakes with respect to attentional incentives. We find that subjects are less responsive to such changes than the model implies. We introduce generalized entropy cost functions that better match this feature of the data and that retain key simplifying features of the Shannon model.

Suggested Citation

  • Andrew Caplin & Mark Dean, 2013. "Behavioral Implications of Rational Inattention with Shannon Entropy," NBER Working Papers 19318, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19318
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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