EconPapers    
Economics at your fingertips  
 

Rational inattention, misallocation, and the aggregate economy

Naveen Gondhi

Journal of Monetary Economics, 2023, vol. 136, issue C, 50-75

Abstract: I study the effect of firm managers’ information-processing constraints on production decisions, resource misallocation, and the aggregate economy. Managers have a finite information-processing capacity to reduce uncertainty about firm-specific and economy-wide shocks. The model implies that an increase in aggregate uncertainty leads to reallocation of capacity from learning about firm-specific shocks to learning about aggregate state, leading to higher misallocation of resources and lower output. In contrast, an increase in idiosyncratic uncertainty (through an opposite mechanism) has a non-monotonic effect on aggregate productivity. The model produces new implications regarding the co-movement of inputs and Labor-TFP sensitivity which I confirm empirically.

Keywords: Rational inattention; Learning; Misallocation; Aggregate uncertainty; Idiosyncratic uncertainty (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S030439322300017X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:136:y:2023:i:c:p:50-75

DOI: 10.1016/j.jmoneco.2023.01.010

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2024-02-12
Handle: RePEc:eee:moneco:v:136:y:2023:i:c:p:50-75