INATTENTION
Behavioral and Policy Implications of Rational Inattention (INATTENTION)*
Program: H2020, ERC Starting Grant
Granting Body: European Commission
Contract No.: 678081
Coordinator: Filip Matějka**
Starting Date: April 2016
Ending Date: March 2021
ANNOTATION:
This proposal outlines agenda which aims to improve our understanding of policies in environments with cognitively limited agents. It seeks to extend and apply the theory of rational inattention developed in macroeconomics. Citizens are inattentive to details of tax codes, government bureaucrats cannot inspect all data about people in need, and voters are highly uninformed about politicians’ campaign platforms. The agenda is specifically targeted at applications where human inability to digest all available information has strong implications for public policy formation. It falls into three broad parts. First (macroeconomics), the proposed research will develop a new model of risk-sharing in a typical modern-macro setting with heterogeneous agents. Instead of incentive constraints, the imperfections will be driven by the government’s or citizens’ inability to process all available information. What are the properties of the resulting system of redistribution? Why do taxes often take a simple form? Can minorities be left behind because they attract less of the government’s attention? Second (behavioral economics), it will extend the rational inattention theory to model how agents simplify multidimensional features of the environment. Among many applications, the theory is likely to provide an alternative explanation for mental accounting, when people have separate budgets for different types of expenditures (critical to consumption decisions, especially of the poor), and for salience of different elements of the tax code. Third (political economy), it will develop a unified framework to study implications of voters’ rational inattention (selective ignorance) for the outcomes of political processes, such as for popular demand for misguided policies, public good provision, and the complexity of announced platforms. Voters’ information acquisition and fragmented information processing will be studied in a field experiment.
WORK IN PROGRESS:
1) Botond Koszegi and Filip Matejka: An Attention-based Theory of Mental Accounting
In this paper, we develop a theory of mental accounting based on the idea that individuals find it too costly to think through all relevant information for making consumption choices, and therefore they pick and choose what information to pay attention to. When deciding how to allocate her budget between different consumption goods, the agent finds it most useful to think about which of multiple substitutable goods to consume, and less useful to think about how to trade o dissimilar goods. As a result, she behaves as if she had a mental account for the most substitutable goods, with the breadth of her account being determined endogenously by her preferences and attention costs. When managing her lower-interest checking account and higher-interest savings account, the agent finds it more useful to pay attention to her checking-account balance, as she would like to balance this account and transfer as much as possible to the savings account. As a result, her consumption is more responsive to the checking-account balance than to the savings-account balance, and this difference is more pronounced when the interest-rate differential between the accounts is higher. And when the agent receives a targeted transfer such as a child benet, she finds it more worthwhile to think about whether a high level of targeted consumption is valuable, and as a result consumes more on average.
2) Filip Matejka and Guido Tabellini: Electoral Competition with Rationally Inattentive Voters
This paper studies how voters' selective ignorance interacts with policy design by political candidates. It shows that the selectivity empowers voters with extreme preferences and small groups, divisive issues attract most attention and public goods are underfunded. Finer granularity of information increases these inefficiencies. Rational inattention can also explain why competing candidates do not always converge on the same policy issues, and how the poor are politically empowered by welfare programs.
DISSEMINATION:
3rd Conference on Rational Inattention and Related Topics
*This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement No 678081).
** Filip Matejka's personal website: http://home.cerge-ei.cz/matejka/index.html
