Transitory shocks, limited attention, and a firm’s decision to exit

Avi Goldfarb and Mo Xiao

Quantitative Marketing and Economics (QME), 2024, vol. 22, issue 3, No 1, 223-255

Abstract: Abstract This paper investigates the incidence of limited attention in a high-stakes business setting: a bar owner may be unable to purge transitory shocks from noisy profit signals when deciding whether to exit. Combining a 24-year monthly panel on the alcohol revenues from every bar in Texas with weather data, we find suggestive evidence that inexperienced, distantly located owners may overreact to the transitory component of revenue relative to the persistent component. This apparent asymmetric response is muted under higher revenue fluctuations. We formulate and estimate a structural model to endogenize attention allocation by owners with different thinking cost. Under the assumptions of the model, we find that 3.9% bars make incorrect exit decisions due to limited attention. As exits are irreversible, permanent decisions, small mistakes at the margin interpreting profit signals can lead to large welfare losses for entrepreneurs.

Keywords: Inattention; Bounded rationality; Exit; Behavioral industrial organization (search for similar items in EconPapers)
JEL-codes: D9 L2 L8 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11129-024-09279-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:kap:qmktec:v:22:y:2024:i:3:d:10.1007_s11129-024-09279-y

Ordering information: This journal article can be ordered from
http://www.springer. ... ng/journal/11129/PS2

DOI: 10.1007/s11129-024-09279-y

Access Statistics for this article

Quantitative Marketing and Economics (QME) is currently edited by Pradeep Chintagunta

More articles in Quantitative Marketing and Economics (QME) from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().