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

Listed author(s):
  • Takii, Katsuya

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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 2 (February)
Pages: 345-362

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:2:p:345-362
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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