Posterior-Separable Costs and Menu Preferences

Abstract

We consider an agent with a rationally inattentive preference over menus of acts, as in de Oliveira et al (2017). We show that two axioms, Independence of Irrelevant Alternatives and Ignorance Equivalence, are necessary and sufficient for this agent to have a posterior-separable cost satisfying a mild smoothness condition, called joint-directional differentiability. Viewing the decision-maker's problem as a Bayesian persuasion problem, we also show that these axioms are necessary and sufficient for solvability by a unique hyperplane. When the cost function remains invariant for different priors, we show that these axioms imply uniformly posterior separable costs that are differentiable.