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Limited attention, interaction and the gradual adjustment of a firm's decisions

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  • Takii, Katsuya

Abstract

A 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.

Suggested Citation

  • Takii, Katsuya, 2009. "Limited attention, interaction and the gradual adjustment of a firm's decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 345-362, February.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:2:p:345-362
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