Review of Economic Studies Vol. 73 No. 3 2006
Inattentive Producers
Abstract
I present and solve the problem of a producer who faces costs of acquiring, absorbing, and processing information. I establish a series of theoretical results describing the producer's behaviour. First, I find the conditions under which the producer prefers to set a plan for the price he or she charges, or instead prefers to set a plan for the quantity he or she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating his or her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behaviour of many such producers. I apply these results to a model of inflation. I find that the model can fit the quantitative facts on post-war inflation remarkably well, that it is a good forecaster of future inflation, and that it survives the Lucas critique by fitting also the pre-war facts on inflation moderately well.
- DOI
- 10.1111/j.1467-937x.2006.00396.x
- Volume
- 73
- Issue
- 3
- Pages
- 793-821
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref