Inattentive Producers

Ricardo Reis

No 5393, CEPR Discussion Papers from Centre for Economic Policy Research

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 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 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.

Keywords: Inattentiveness; Production; Pricing under uncertainty; Inflation; Sticky information (search for similar items in EconPapers)
JEL-codes: D92 E20 E31 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Inattentive Producers (2006)
Working Paper: Inattentive Producers (2005)
Working Paper: Inattentive Producers (2005)
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