Attention is costly
Unlike rational expectations, Sims (1998, 2003) capped processing capacity with Shannon (1948) entropy, so agents choose what to attend to.
Macro applications
Maćkowiak and Wiederholt (2009) showed firms neglect aggregate shocks, producing slow price adjustment, an alternative to menu costs and Mankiw and Reis's (2002) sticky information.
Micro choice
Matějka and McKay (2015) derived the logit model; Maćkowiak and colleagues (2023) review applications. Unlike information asymmetry, information exists but is left unprocessed.
FAQ
- What is it in simple terms?
- Since you cannot read everything, focusing on what matters most is the smart choice.
- Why are prices slow to move?
- Firms pay more attention to their own markets than to economy-wide shocks.
Sources reviewed: 2026-10-26
References
- Shannon, C. E. (1948). A mathematical theory of communication. Bell System Technical Journal, 27(3), 379–423. The source of the entropy measure used to model attention costs.
- Sims, C. A. (1998). Stickiness. Carnegie-Rochester Conference Series on Public Policy, 49, 317–356. An early attempt to explain stickiness by limited information processing.
- Sims, C. A. (2003). Implications of rational inattention. Journal of Monetary Economics, 50(3), 665–690. The paper that formalised rational inattention.
- Mankiw, N. G., & Reis, R. (2002). Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics, 117(4), 1295–1328. A related sticky-information model worth comparing.
- Maćkowiak, B., & Wiederholt, M. (2009). Optimal sticky prices under rational inattention. American Economic Review, 99(3), 769–803. Applies the idea to firms' price setting.
- Matějka, F., & McKay, A. (2015). Rational inattention to discrete choices: A new foundation for the multinomial logit model. American Economic Review, 105(1), 272–298. Shows how the theory grounds discrete-choice models.
- Maćkowiak, B., Matějka, F., & Wiederholt, M. (2023). Rational inattention: A review. Journal of Economic Literature, 61(1), 226–273. A comprehensive recent review.