Inattentive Producers

Ricardo Reis

The Review of Economic Studies, 2006, vol. 73, issue 3, 793-821

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. Copyright 2006, Wiley-Blackwell.

Date: 2006
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Working Paper: Inattentive Producers (2005)
Working Paper: Inattentive Producers (2005)
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