Empirical Tests of Rational Inattention
Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM
- Chair: Mark Dean, Columbia University
Inflation Expectations, Learning and Supermarket Prices: Evidence From Survey Experiments
AbstractInformation frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in lower-inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is made readily available, individuals still place a significant weight on less accurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discussing the implications of these findings for macroeconomic models and policy-making.
Experimental Tests of Rational Inattention
AbstractRecent theoretical work has uncovered the testable predictions of models of rationally inattentive choice, according to which decision makers choose what information to attend to in order to maximize utility from subsequent choices net of information costs. In this paper we introduce a novel experimental framework which allows us to collect the data required for such tests. We show that, in simple settings, subjects behave in a manner which is consistent with a general model of rational inattention. However, behavior deviates in important ways from the predictions of the rational inattention model in which costs are based on the Shannon mutual information between prior and posterior beliefs, as commonly assumed in the applied literature.
- C0 - General