Inattention to States and Characteristics

Abstract

We introduce a rational inattention model which produces a unique, interior, weighted multinomial logit conditional choice probability for an agent who acquires costly information about the hedonic characteristics (e.g. whether an insurance contract has high coverage) of their choices and about their payoff-relevant states (e.g. their risk of incurring a loss). As usual, the objective is to choose a joint distribution subject to one marginal constraint (``Bayes plausibility''). We approach the problem by re-writing it in terms of an inner problem of maximizing over \textit{two} constraints and an outer problem of choosing the ``optimal constraint.'' The inner problem is a Schr\"odinger bridge problem. The outer problem is strictly concave.