Coordination with flexible information acquisition

Abstract

We study flexible information acquisition in a coordination game. "Flexible" acquisition means that players choose not only how much but also what kind of information to acquire. Information acquisition has a cost proportional to reduction of entropy. Hence, players will collect the information most relevant to their welfare but can be rationally inattentive to other aspects of the fundamental. When information is cheap, this flexibility enables players to acquire information that makes efficient coordination possible, which also leads to multiple equilibria. This result contrasts with the global game literature, where information structure is less flexible and cheap information leads to a unique equilibrium with inefficient coordination.

How can neuroscience inform economics?

“…A key ingredient to these models is the cognitive cost of acquiring information. Unfortunately, such costs are not generally well understood, and the precise form of the cost function can have an important impact on predicted economic behavior [33]. One approach is to treat these costs as unknown [34], which limits the predictive power of such models.…”

“…It is assumed that the decision maker wants to learn which state of the world has occurred from a possible set V. Their prior beliefs are given by m. Rather than consider the specifics of a particular learning problem, the decision maker is modeled as choosing an information structure, which consists of a set of signals G, and a probabilistic mapping from states of the world to signals, with p(g|v) the probability of receiving signal g in state of the world v. While this can look rather abstract, this setup nests most models of optimal information acquisition [33]. It can also be readily applied to many of the perceptual tasks that have been studied in the psychology and psychophysics literatures by thinking of the state as the true value of some stimulus.…”

Information quality and crises in regime-change games

“…We study the effects of a change in absolute information quality (the overall precision of an agent's posterior beliefs) and the effects of a change in relative information quality (the relative precision of public and private information). We show that relative payoff sensitivities matter for the effects of The focus of our paper on the information structure itself is shared by a growing literature on endogenous information acquisition [26,34,13,38,37]. Our analysis complements this literature by examining how particular changes in the information structure (i.e.…”

“…Agents are endowed with a particular information generation technology, and we study the equilibrium consequences of changes in information quality. We have abstracted from the tradeoffs that agents would face when choosing among alternative information structures, which is the main focus of the growing literature on endogenous information acquisition ( [26,34,13,38,37], among others). 16 Our analysis is complementary to this literature.…”

“…Following the "rational inattention" approach of Sims [36], a promising new branch of research initiated by Yang [38] allows agents to choose any arbitrary signal generation structure subject to a cost that is proportional to the reduction of entropy it induces. In other words, agents can specifically tailor which events they become better informed about.…”