Abstract
We relate two main representations of the cost of acquiring information: a cost that depends on the experiment performed, as in statistical decision theory, and a cost that depends on the distribution of posterior beliefs, as in applications of rational inattention. We show that in many cases of interest, posterior-based costs are inconsistent with a primitive model of costly experimentation. The inconsistency is at the core of known limits to the application of rational inattention in games and, more broadly, in equilibrium analyses where beliefs are endogenous; we show that an experiment-based approach helps to understand and overcome these difficulties.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 3106-3123 |
| Number of pages | 18 |
| Journal | American Economic Review |
| Volume | 112 |
| Issue number | 9 |
| DOIs | |
| State | Published - Sep 2022 |
Bibliographical note
Funding Information:* Denti: Cornell University (email: tjd237@cornell.edu); Marinacci: Università Bocconi and IGIER (email: massimo.marinacci@unibocconi.it); Rustichini: University of Minnesota (email: aldo.rustichini@gmail.com). Sylvain Chassang was the coeditor for this article. We thank the referees for their comments and suggestions. We also thank Francesco Fabbri, Fabio Maccheroni, Jeffrey Mensch, Stephen Morris, and Alex Wolitzky for useful discussions. Massimo Marinacci gratefully acknowledges the financial support of ERC (grant INDIMACRO). Aldo Rustichini thanks the US Department of Defense (contract W911NF2010242).
Publisher Copyright:
© 2022 American Economic Association. All rights reserved.