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Inattentive Producers

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  • Ricardo Reis

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 behavior. 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 behavior 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11820.

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Date of creation: Dec 2005
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Publication status: published as Reis, Ricardo. "Inattentive Producers," Review of Economic Studies, 2006, v73(3,Jul), 793-821.
Handle: RePEc:nbr:nberwo:11820

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