scholarly journals Revealed Preference, Rational Inattention, and Costly Information Acquisition

2015 ◽  
Vol 105 (7) ◽  
pp. 2183-2203 ◽  
Author(s):  
Andrew Caplin ◽  
Mark Dean
Keyword(s):  
General Model ◽  
Information Acquisition ◽  
Revealed Preference ◽  
Preference Test ◽  
Information Costs ◽  
Choice Data ◽  
Rational Inattention ◽  
Costly Information ◽  
Trade Off ◽  
Expected Benefits

Apparently mistaken decisions are ubiquitous. To what extent does this reflect irrationality, as opposed to a rational trade-off between the costs of information acquisition and the expected benefits of learning? We develop a revealed preference test that characterizes all patterns of choice “mistakes” consistent with a general model of optimal costly information acquisition and identify the extent to which information costs can be recovered from choice data. (JEL D11, D81, D83)

scholarly journals Optimality of Debt under Flexible Information Acquisition

2019 ◽  
Vol 87 (1) ◽  
pp. 487-536 ◽  
Author(s):  
Ming Yang
Keyword(s):  
Adverse Selection ◽  
Information Acquisition ◽  
Design Problem ◽  
General Information ◽  
Security Design ◽  
Information Costs ◽  
Information Structures ◽  
Costly Information ◽  
Underlying Asset ◽  
Distributional Assumptions

Abstract This article studies a security design problem featuring flexible information acquisition. To raise liquidity, a seller issues a security backed by her asset in place at the price she proposes to a buyer. Before deciding whether to accept the offer, the buyer can acquire costly information about the underlying asset. This case differs from the existing literature on security design, in that the buyer has the full flexibility of choosing not only the amount of resources to spend in information acquisition, but also how to allocate them, depending on the shape of the security. Debt is shown to be the unique optimal security for the seller, as its payoff is the least sensitive to the value of its underlying asset. This minimizes the buyer’s incentive to acquire information and mitigates the resulting adverse selection. I do not assume monotonicity of the feasible securities nor impose various distributional assumptions on information structures. Instead, I identify conditions for general information costs that support the results.

Neighborhood-Based Information Costs

2021 ◽  
Vol 111 (10) ◽  
pp. 3225-3255
Author(s):  
Benjamin Hébert ◽  
Michael Woodford
Keyword(s):  
Mutual Information ◽  
Topological Structure ◽  
Cost Functions ◽  
Binary Choice ◽  
Information Costs ◽  
Linear Quadratic ◽  
Rational Inattention ◽  
Linear Quadratic Gaussian ◽  
Perceptual Judgments ◽  
Perceptual Distance

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. (JEL C70, D11, D82, D83, D91)

Costly information acquisition under horizontal competition

2018 ◽  
Vol 46 (4) ◽  
pp. 418-423
Author(s):  
Qi Fu ◽  
Yongquan Li ◽  
Kaijie Zhu
Keyword(s):  
Information Acquisition ◽  
Costly Information ◽  
Horizontal Competition

Product Proliferation under Rational Inattention: Application to Health Insurance

2021 ◽  
Vol 111 ◽  
pp. 554-559
Author(s):  
Zach Y. Brown ◽  
Jihye Jeon
Keyword(s):  
Health Insurance ◽  
Prescription Drug ◽  
Market Share ◽  
Information Acquisition ◽  
Rational Inattention ◽  
Drug Insurance ◽  
Acquisition Costs ◽  
Using Data ◽  
Product Proliferation ◽  
To Receive

In markets with complicated products such as insurance, why do firms offer many products even when consumers appear to receive little benefit? We show that when consumers face information acquisition costs, firms may have an incentive to introduce many undifferentiated products. This allows firms to gain market share and increase markups. We document initial evidence consistent with the model using data from Medicare prescription drug insurance. Insurers that offer more duplicate or similar plans have higher-cost plans. These results suggest a role for policymakers to restrict product proliferation in markets with complicated products.

Choosing Your Pond: Location Choices and Relative Income

2020 ◽  
pp. 1-46 ◽  
Author(s):  
Nicolas L. Bottan ◽  
Ricardo Perez-Truglia
Keyword(s):  
Medical Students ◽  
Field Experiment ◽  
Survey Data ◽  
Revealed Preference ◽  
Information Provision ◽  
Relative Income ◽  
Choice Data ◽  
Location Choices ◽  
Income Distributions ◽  
Data Survey

Do individuals care about their relative income? While this is a long-standing hypothesis, revealed-preference evidence remains elusive. We provide a unique test by studying residential choices: individuals often must choose between places with different income distributions, and as a result they “choose” their relative income. We conducted a field experiment with 1,080 senior medical students who participated in the National Resident Matching Program. We estimate their preferences by combining choice data, survey data on perceptions and information-provision experiments. The evidence suggests that individuals care about their relative income and that these preferences differ across single and non-single individuals.

Labour-Supply Behaviour

2021 ◽  
pp. 115-149
Author(s):  
Cathal O'Donoghue
Keyword(s):  
Fiscal Policy ◽  
Labour Supply ◽  
Choice Model ◽  
Policy Instruments ◽  
Revealed Preference ◽  
Behavioural Response ◽  
Trade Off ◽  
Measurement Issues ◽  
Labour Participation ◽  
Microsimulation Models

In the preceding chapters, the focus was on simulating policies that aim to reduce poverty, generate revenue, or redistribute resources. However, many public policies also try to incentivize behaviour, such as those to improve labour participation or supply, or to change behaviours in relation to savings or pollution. Social- and fiscal-policy instruments face a fundamental trade-off. An instrument that performs well from an income-maintenance perspective may have unintended behavioural consequences. This chapter considers the structure of instruments that have an explicit goal to improve behavioural response, particularly focusing on in-work benefits. The chapter also describes how to use a microsimulation mode to simulate the inputs required for the estimation of a behavioural-econometric model, and then estimates a revealed-preference-choice model. The chapter then describes a method often used in microsimulation models to calibrate choice models for simulation purposes. In terms of measurement issues related to the behavioural analysis, we describe the design and use of replacement rates. The chapter concludes by undertaking a simulation of the introduction of a change in in-work benefits.

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