Beauty Contest with Rationally Inattentive Agents

Abstract

In the context of a beauty-contest coordination game, players choose how much costly attention to pay to public information. Introducing information costs based on rational inattention implies that, in the neighborhood of zero information costs, multiple equilibria can emerge in settings that without information costs would imply unique linear equilibrium. Agents have a coordination motive arising from strategic complementarity in their actions, which, in turn, implies coordinating on attention devoted to the public signal. This effect induces multiple equilibrium levels of attention at intermediate levels of transparency of public information (worth paying attention to if others do, but not worth paying attention to if others do not) for small enough information costs. Formally, the set of equilibria under rational inattention does not converge to the set of equilibria without information costs as the price of attention approaches zero. Quintessentially, small deviations from rationality can make significant differences to economic equilibria.