Inattentive Producers

Ricardo Reis

No 11820, NBER Working Papers from National Bureau of Economic Research, Inc

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 behavior. First, I find the conditions under which she prefers to set a plan for the price she charges, or instead prefers to set a plan for the quantity she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behavior 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.

JEL-codes: D92 E20 E31 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (11)

Published as Reis, Ricardo. "Inattentive Producers," Review of Economic Studies, 2006, v73(3,Jul), 793-821.

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Journal Article: Inattentive Producers (2006)
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