Publication Date
Financial Markets Group Discussion Papers DP 937
Complexity can create value. At the same time, understanding more complex goods requires more of an agent’s attention. We show that equilibrium complexity is generally inefficient when agents face competing demands on their limited attention. Because attention allocation is hump-shaped in complexity, equilibrium complexity is distorted towards intermediate levels: well-understood goods are inefficiently complex, whereas less well-understood goods are oversimplified. We apply our model to financial institutions facing regulatory bodies and CEOs interacting with corporate divisions.
