Neighborhood-Based Information Costs / Benjamin M. Hébert, Michael Woodford.

Format:

Book

Author/Creator:

Hébert, Benjamin M.

Contributor:

National Bureau of Economic Research.

Woodford, Michael.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26743.

NBER working paper series no. w26743

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

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.

Notes:

Print version record

February 2020.