Rational inattention theory is economic theory that recognizes that people have finite information-processing capacity …, in the sense of Shannon and engineering information theory. This approach is still in the early stages of development … macroeconomics and finance. In this chapter we introduce the basic ideas of information theory, show how it can be introduced …

a continuous-time utility model, we capture the behavior of a continuum of consumers who are differentiated by their … dissemination. In each case, we first specify the conditions under which consumer rational behavior supported by the utility model …