Costly subjective learning

Abstract

We examine the behavioral foundation of rational inattention within a menu-choice framework. Unlike previous studies, our approach enables the unique identification of nonadditive information costs. The nonadditivity of information costs makes the effective cost inherently dependent on benefits of information. In contrast to additive cost models, this feature may lead to a violation of the preference for early resolution of menu uncertainty. Early resolution is typically preferable as it allows the agent to fine-tune information for relevant menus. However, if the effective cost function is convex in benefits of information, late resolution may reduce the effective information costs. The violation occurs when this cost-reduction effect outweighs the benefits of early resolution.