Essays on Attention in Economics

Abstract

This collection of essays investigates the effects of limited attention on economic outcomes. Chapter 1 studies a random choice procedure which I call Focus, Then Compare. First, the agent focuses on an option at random from the choice set. Then, she compares the focal option to each other alternative in the set. Comparisons are binary, random and independent of each other. The agent chooses the focal option if and only if it passes all comparisons favorably. Otherwise, the agent draws a new focal option with replacement. I characterize the revealed preference implications of the procedure, and show that it can accommodate a range of experimental findings, including the Attraction effect, Compromise effect and Choice overload. I then show that the procedure can approximate some deterministic models used in the literature to explain violations of utility maximization. Chapter 1 was presented at the “Decision - Theory, Experiments, and Applications 2012” conference. Chapter 2 studies a one-sided offers bargaining game in which a fully rational seller is making repeated offers to a rationally inattentive buyer (Sims, 2003). The good's quality is random and is known to the seller. The buyer needs to pay attention to both the quality of the good and the seller's offers. I show that the buyer attains half of the uncertain portion of the surplus as attention costs become negligible and offers are frequent. With infrequent offers the equilibrium involves the buyer paying more for, but also obtaining a higher surplus from, higher quality goods. Trade occurs with delay that is decreasing with the quality of the good and persists even when offers are frequent. Finally, I show that revealing the quality of the good to the buyer reduces both the buyer's surplus and overall efficiency.