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Dynamic discrete choice under rational inattention

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Abstract

We adopt the posterior-based approach to study dynamic discrete choice problems under rational inattention. We provide necessary and sufficient conditions to characterize the solution for general uniformly posterior-separable cost functions. We propose an efficient algorithm to solve these conditions and apply our model to explain phenomena such as perceptual distance, status quo bias, confirmation bias, and belief polarization. A key condition for our approach to work is the concavity of the difference between the generalized entropy of the current posterior and the discounted generalized entropy of the prior beliefs about the future states.

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Authors and Affiliations

  1. Department of Economics, Boston University, 270 Bay State Road, Boston, MA, 02215, USA

    Jianjun Miao

  2. Department of Finance, Questrom School of Business, Boston University, 595 Commonwealth Ave, Boston, MA, 02215, USA

    Hao Xing

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  1. Jianjun Miao
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  2. Hao Xing
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Correspondence to Jianjun Miao.

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We thank Andrew Caplin, Mark Dean, John Leahy, Bart Lipman, Stephen Morris, Jakub Steiner, Colin Stewart, and Mike Woodford for helpful discussions.

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Miao, J., Xing, H. Dynamic discrete choice under rational inattention. Econ Theory 77, 597–652 (2024). https://doi.org/10.1007/s00199-023-01512-1

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