Essays on Implications of Rational Inattention to Discrete Choices

Matveenko, Andrei

In the first chapter we study fundamental links between two popular approaches to con sumer choice: the multinomial logit model of individual discrete choice and the CES utility function, which describes a multiple choice of a representative consumer. We base our analysis on the rational inattention (RI) model and show that the demand system of RI agents, each of whom chooses a single option, coincides with the demand system of a fictitious representative agent with a CES utility function. Thus, the diversified choice of the representative agent may be explained by the heterogeneity in signals received by the RI agents. We obtain a new interpretation for the elasticity of substitution and the weighting coefficients of the CES utility function. Specifically, we provide a correspon dence between parameters of the CES utility function, prior knowledge and marginal cost of information. In the second paper we investigate the role of a value of a known policy with certain payoff on agents' information acquisition and belief polarization. We model agents to be rationally inattentive: some information about the new policy can be acquired before a choice is made, but doing so is costly. We show that even small changes in the agents' perception of the status quo can lead to polarization of opinions. Such...

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