Paying for Inattention

Abstract

We extend the discrete-choice rational inattention model to the case in which the decision maker can influence the payoff distribution across states. By reducing the gap between payoffs in different states, the decision maker is able to affect her own incentives to pay attention. The smaller the gap, the less attentive the decision maker needs to be. This new framework with endogenous incentives allows to derive a novel method for eliciting the attention level solely by observing the decision maker's incentive redistribution choice. As a result, we have two methods for observing the same variable of interest – targeted success probability: (i) through actual performance (method used in the literature); and (ii) through our model estimation, using incentive redistribution choices. Having two ways of identifying the targeted probability of success allows us to test rational inattention models without making any assumptions on the cost of attention function. Furthermore, the new framework allows us to identify and test the properties of the attention cost function.