Too Much of a Good Thing: Attention Misallocation and Social Welfare in Coordination Games

Chen, Heng and Luo, Yulei and Pei, Guangyu (2014): Too Much of a Good Thing: Attention Misallocation and Social Welfare in Coordination Games.

Abstract

This paper examines the welfare properties of “beauty contest” games with rationally inattentive agents. Agents allocate attention between private and public signals to reduce the uncertainty about observation noises. In this setting, social welfare may not necessarily increase with the capacity to process information, and can actually decrease as a result of attention misallocation. Strikingly, social welfare can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Coordination game, social welfare, rational inattention
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; D - Microeconomics > D6 - Welfare Economics > D60 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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