American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Neighborhood-Based Information Costs
American Economic Review
vol. 111,
no. 10, October 2021
(pp. 3225–55)
Abstract
We derive a new cost of information in rational inattention problems, the neighborhood-based cost functions, starting from the observation that many settings involve exogenous states with a topological structure. These cost functions are uniformly posterior separable and capture notions of perceptual distance. This second property ensures that neighborhood-based costs, unlike mutual information, make accurate predictions about behavior in perceptual experiments. We compare the implications of our neighborhood-based cost functions with those of the mutual information in a series of applications: perceptual judgments, the general environment of binary choice, regime-change games, and linear-quadratic-Gaussian settings.Citation
Hébert, Benjamin, and Michael Woodford. 2021. "Neighborhood-Based Information Costs." American Economic Review, 111 (10): 3225–55. DOI: 10.1257/aer.20200154Additional Materials
JEL Classification
- C70 Game Theory and Bargaining Theory: General
- D11 Consumer Economics: Theory
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making