Inattentive Economies

George-Marios Angeletos and Karthik A. Sastry

Journal of Political Economy, 2025, vol. 133, issue 7, 2265 - 2319

Abstract: We study the efficiency of inattentive but otherwise frictionless economies by augmenting the Arrow-Debreu framework with a flexible form of rational inattention. If attention costs satisfy an invariance condition embedded in Sims’s mutual information specification, a version of the first welfare theorem holds no matter the degree of inattention. More generally, however, a cognitive externality may emerge, and welfare may be improved by regulating and simplifying markets. We discuss how these results qualify Hayek’s argument about the informational optimality of the price system, how they link the normative question of interest to a decision-theoretic literature on stochastic choice, and how they separate paternalistic and nonpaternalistic approaches to modeling inattention.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1086/734870 (application/pdf)
http://dx.doi.org/10.1086/734870 (text/html)
Access to the online full text or PDF requires a subscription.

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:ucp:jpolec:doi:10.1086/734870

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().