Journal Article

Inattentive Producers

Ricardo Reis

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 3, pages 793-821
Published in print July 2006 | ISSN: 0034-6527
Published online July 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00396.x
Inattentive Producers

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  • Production and Organizations
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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.

Keywords: D21; E31

Journal Article.  15253 words.  Illustrated.

Subjects: Production and Organizations ; Prices, Business Fluctuations, and Cycles

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