Paying for inattention

Abstract

We augment the standard rational inattention model by allowing the decision maker to alter the distribution of payoffs. The model captures real-life circumstances in which decision makers choose their incentives to pay attention, for instance, through the choice of insurance (full-coverage contracts reduce the incentives to pay attention compared to partial coverage). This new framework, specifically the ability to observe the decision maker’s choice of payoff redistribution, allows us to elicit the decision maker’s targeted attention level. This is a novel method of eliciting the object of interest—attention—typically obtained through performance (i.e., repetitions) in the literature. Furthermore, by manipulating the cost of payoff redistribution, the framework allows us to examine rational inattention models without making parametric assumptions on the cost of attention function. With a laboratory experiment, we validate novel comparative static predictions of our model. The subjects respond to the link between payoff redistribution decisions and attention in accordance to the theory.