Alexandros Rigos: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Abstract: This paper studies how large populations of rationally inattentive individuals acquire information about economic fundamentals when, along with the motive to accurately estimate the fundamental, they have coordination motives. Information acquisition is costly but flexible: players freely choose how to correlate their signal with the fundamental, paying costs linear in Shannon mutual information. A characterization of the class of equilibria in continuous strategies is provided, without restricting the fundamental to follow a normal prior. Equilibria where the population-wide average action is an affine function of the fundamental exist only when the fundamental is normally distributed. A novel method that allows the study of non-normal priors is developed. Using this method, the paper demonstrates that small departures from normality can lead to distributions of equilibrium actions that differ significantly from those of Gaussian models. Such “distortions” can potentially explain highly skewed distributions of observed actions (e.g. prices) even if economic fundamentals are almost normally distributed.
50 pages, First version: November 7, 2018. Revised: May 5, 2020. Earlier revisions: August 9, 2019.
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