Bounded Attention and Attenuated Elasticities

We study how bounded attention affects the structural estimation of the elasticity of substitution. In a sparse-max model, equilibrium prices and expenditure shares are observationally equivalent to those of a rational market. Its elasticity equals the structural elasticity scaled by the attention weight. The supply-side orthogonality condition of the covariance-based estimator holds at this attenuated elasticity but fails at the truth. Absent outside information, the estimator converges to the attenuated elasticity. Bounded attention leads to an identification failure that finite-sample and weak-instrument corrections cannot resolve. Because attention cannot exceed one, the estimate provides a lower bound on the structural elasticity.

Source: arXiv:2607.19929v1 - http://arxiv.org/abs/2607.19929v1 PDF: https://arxiv.org/pdf/2607.19929v1 Original Link: http://arxiv.org/abs/2607.19929v1