Posterior Separable Cost of Information
American Economic Review · 2022 · Volume 112 · Issue 10
Abstract
We provide testable conditions under which the cost of acquiring information is given by the expected reduction of a measure of uncertainty (e.g., entropy). The assumption, under the name of posterior separability, is nearly universal in the literature of rational inattention; yet, a testable characterization has been lacking. In applications to experimental data, we indicate situations in which posterior separability is—and is not—a compelling assumption for the cost of information; we propose a generalization to address some of its shortcomings. We also show how to identify and estimate nonparametrically the cost of information from observable choice behavior.
Keywords
Design of Experiments: Laboratory, Individual, Consumer Economics: Theory, Consumer Economics: Empirical Analysis, Criteria for Decision-Making under Risk and Uncertainty, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
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