Bounded Attention and Attenuated Elasticities

2026-07-22

AI Summary

This study investigates how limited attention systematically distorts the identification and estimation of structural parameters governing elasticities of substitution. By developing a sparse utility-maximization model that integrates covariance-moment estimation with supply-side orthogonality conditions, the paper demonstrates for the first time that although price and expenditure-share data under limited attention are observationally equivalent to those generated by a fully rational model, the estimated elasticities correspond to lower bounds of the true elasticities—attenuated by attention weights. This bias stems from fundamental identification constraints and cannot be mitigated by finite-sample corrections or weak-instrument robust methods. In the absence of external information, estimators necessarily converge to the attenuated values rather than the true parameters, thereby establishing limited attention as a fundamental constraint on structural estimation.

Abstract

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.

Problem

• bounded attention
• elasticity of substitution
• structural estimation
• identification failure
• attenuated elasticity

Innovation

• bounded attention
• elasticity of substitution
• structural estimation
• identification failure
• attenuated elasticity