DP10720 Rational Inattention Dynamics: Inertia and Delay in Decision-Making

Author(s): Filip Matejka, Jakub Steiner, Colin Stewart
Publication Date: July 2015
Keyword(s): adjustment delay, dynamic logit, information acquisition, rational inattention
JEL(s): D81, D83, D90
Programme Areas: Industrial Organization, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10720

We solve a general class of dynamic rational-inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased towards an optimal default rule that depends only on the history of actions, not on the realized state. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision-making.