Rationally inattentive preferences and hidden information costs

Abstract

We show how information acquisition costs can be identified using observable choice data. Identifying information costs from behavior is especially relevant when these costs depend on factors–such as time, effort and cognitive resources–that are difficult to observe directly, as in models of rational inattention. Using willingness-to-pay data for opportunity sets–which require more or less information to make choices–we establish a set of canonical properties that are necessary and sufficient to identify information costs. We also provide an axiomatic characterization of the induced rationally inattentive preferences, and show how they reveal the amount of information a decision maker acquires.