Neighborhood-Based Information Costs

We derive a new cost of information in rational inattention problems, the neighborhood-based functions, starting from observation that many settings involve exogenous states with topological structure. These functions are uniformly posterior separable and capture notions perceptual distance. This second property ensures costs, unlike mutual information, make accurate predictions about behavior experiments. compare implications our those series applications: judgments, general environment binary choice, regime-change games, linear-quadratic-Gaussian settings. (JEL C70, D11, D82, D83, D91)