Rational Inattention to States and Choice Characteristics

Abstract

This paper characterizes rationally inattentive behaviour under Shannon information costs when preferences depend on uncertain choice characteristics in addition to a payoff-relevant state. The optimal conditional choice probability exists, is unique, and assigns positive probability to every ambient characteristic, allowing dominated realized outcomes without treating them as deliberate choices. Conditional choice is pulled toward ubiquitous characteristics when options are costly to identify and toward unconditional behavior when states are costly to learn. A designer can improve welfare without estimating utility by shifting exposure toward observed demand. Compared to classic rational inattention, our model introduces only one new parameter, which is non-parametrically over-identified under product entry.