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Inattentive Economies

Author

Listed:
  • George-Marios Angeletos
  • Karthik A. Sastry

Abstract

We study the efficiency of inattentive but otherwise frictionless economies by augmenting the Arrow-Debreu framework with a flexible form of rational inattention. If attention costs satisfy an invariance condition embedded in Sims’s mutual information specification, a version of the first welfare theorem holds no matter the degree of inattention. More generally, however, a cognitive externality may emerge, and welfare may be improved by regulating and simplifying markets. We discuss how these results qualify Hayek’s argument about the informational optimality of the price system, how they link the normative question of interest to a decision-theoretic literature on stochastic choice, and how they separate paternalistic and nonpaternalistic approaches to modeling inattention.

Suggested Citation

  • George-Marios Angeletos & Karthik A. Sastry, 2025. "Inattentive Economies," Journal of Political Economy, University of Chicago Press, vol. 133(7), pages 2265-2319.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/734870
    DOI: 10.1086/734870
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    Cited by:

    1. Dominik Naeher, 2023. "The Social Planning Problem with Costly Information Processing: Towards Understanding Production Decisions in Centralized Economies," Economica, London School of Economics and Political Science, vol. 90(357), pages 285-314, January.
    2. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    3. Angeletos, George-Marios & Iovino, Luigi & La'O, Jennifer, 2020. "Learning over the business cycle: Policy implications," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Pavan, Alessandro, 2025. "Attention, coordination, and bounded recall," Journal of Economic Theory, Elsevier, vol. 227(C).

    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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