Attention Cycles

Joel P. Flynn and Karthik Sastry

No 32553, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how bounded rationality coevolves with the business cycle. We introduce a business-cycle model in which firms face a cognitive cost of making precise decisions. Theoretically, we characterize equilibrium with non-parametric, state-dependent stochastic choice. Firms have greater incentives to pay attention in downturns because they are owned by risk-averse households. Correspondingly, the model generates counter-cyclical attention, pro-cyclical mistakes, and an endogenous attention wedge that depresses aggregate productivity when attention is low. Empirically, we test the model's predictions using novel measures of firms' mistakes and attention. Quantitatively, attention cycles generate significant stochastic volatility of output growth and shock propagation asymmetries.

JEL-codes: E32 E44 E71 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-dge and nep-neu
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