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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 toward 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. This paper was accepted by Will Cong, finance. Funding: This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation program Grant 715467.
Oehmke et al. (Mon,) studied this question.