Limited attention, interaction and the gradual adjustment of a firm's decisions
AbstractA person cannot make many decisions at a time, but an organization needs millions of interrelated decisions. We incorporate this idea into a standard theory of production. Two assumptions are emphasized: an agent cannot optimize more than one input at a time, and there is interaction among inputs. When a firm alternates its attention, the demand for inputs gradually adjusts to the static optimal level. When a firm optimally allocates its attention, this adjustment may not occur. We investigate the conditions under which the adjustment takes place. The results are applied to a standard investment theory. The derived investment-capital ratio is independent of firm size and imperfectly correlated with Tobin's Q.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 33 (2009)
Issue (Month): 2 (February)
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Web page: http://www.elsevier.com/locate/jedc
Limited attention Complementarity and substitutability Gradual adjustment;
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