This paper argues that constraining people to choose consumption and labor under finite Shannon capacity produces results in line with U.S. business cycle data. My model has a simple partial equilibrium setting in which risk averse consumers keep high labor supply and low consumption profile at...

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process about their financial...

This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about...