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A Rational Inattention Perspective on the Social Value of Public Information

What are the implications of rational inattention for the effects of public information on individual behavior and in turn welfare? I examine the impact of rational inattention to public information in the "beauty contest" model of Morris and Shin (2002). I show that with information processing costs in the neighborhood of zero processing costs, the equilibrium behaves discontinuously. In particular, when the strategic complementarity in actions is strong, there are multiple equilibria, indexed by different levels of attention paid to the public signal, for intermediate levels of precision of public information. This discontinuity arises from the fact that the strategic complementarity translates into attention complementarity, a property that emerges only when the information cost is positive (compared to zero). Even when there is a unique equilibrium, I show that ignoring rational inattention tends to overstate the negative welfare effects of enhanced dissemination of public information.