IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2607.19929.html

Bounded Attention and Attenuated Elasticities

Author

Listed:
  • Tingmingke Lu
  • Zhenyi Wang

Abstract

We study how bounded attention affects the structural estimation of the elasticity of substitution. In a sparse-max model, equilibrium prices and expenditure shares are observationally equivalent to those of a rational market. Its elasticity equals the structural elasticity scaled by the attention weight. The supply-side orthogonality condition of the covariance-based estimator holds at this attenuated elasticity but fails at the truth. Absent outside information, the estimator converges to the attenuated elasticity. Bounded attention leads to an identification failure that finite-sample and weak-instrument corrections cannot resolve. Because attention cannot exceed one, the estimate provides a lower bound on the structural elasticity.

Suggested Citation

  • Tingmingke Lu & Zhenyi Wang, 2026. "Bounded Attention and Attenuated Elasticities," Papers 2607.19929, arXiv.org, revised Jul 2026.
    • Handle: RePEc:arx:papers:2607.19929
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2607.19929
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    2. George-Marios Angeletos & Zhen Huo, 2021. "Myopia and Anchoring," American Economic Review, American Economic Association, vol. 111(4), pages 1166-1200, April.
    3. Isaiah Andrews & James H. Stock & Liyang Sun, 2019. "Weak Instruments in Instrumental Variables Regression: Theory and Practice," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 727-753, August.
    4. Soderbery, Anson, 2015. "Estimating import supply and demand elasticities: Analysis and implications," Journal of International Economics, Elsevier, vol. 96(1), pages 1-17.
    5. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1661-1710.
    6. Francesco D’Acunto & Ulrike Malmendier & Juan Ospina & Michael Weber, 2021. "Exposure to Grocery Prices and Inflation Expectations," Journal of Political Economy, University of Chicago Press, vol. 129(5), pages 1615-1639.
    7. Mary Amiti & Stephen J. Redding & David E. Weinstein, 2019. "The Impact of the 2018 Tariffs on Prices and Welfare," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 187-210, Fall.
    8. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    9. Alexander MacKay & Nathan H. Miller, 2025. "Estimating Models of Supply and Demand: Instruments and Covariance Restrictions," American Economic Journal: Microeconomics, American Economic Association, vol. 17(1), pages 238-281, February.
    10. Kory Kroft & Jean-William Laliberté & René Leal-Vizcaíno & Matthew J Notowidigdo, 2024. "Salience and Taxation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 403-437.
    11. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    12. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    13. Stephen J Redding & David E Weinstein, 2020. "Measuring Aggregate Price Indices with Taste Shocks: Theory and Evidence for CES Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 503-560.
    14. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    15. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    16. Leamer, Edward E, 1981. "Is It a Demand Curve, or Is It a Supply Curve? Partial Identification through Inequality Constraints," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 319-327, August.
    17. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    18. Rothenberg, Thomas J, 1971. "Identification in Parametric Models," Econometrica, Econometric Society, vol. 39(3), pages 577-591, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shon M. Ferguson & Aaron Smith, 2022. "Import demand elasticities based on quantity data: Theory and evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(2), pages 1027-1056, May.
    2. Peter Öhlinger & Michael Irlacher & Jochen Güntner, 2024. "Not all oil types are alike in trade substitution," Nature Communications, Nature, vol. 15(1), pages 1-12, December.
    3. Lorenzo Rotunno & Adrian Wood, 2015. "Wages and endowments in a globalised world," Economics Papers 2015-W11, Economics Group, Nuffield College, University of Oxford.
    4. Rotunno, Lorenzo & Wood, Adrian, 2020. "Wage inequality and skill supplies in a globalised world," Journal of Comparative Economics, Elsevier, vol. 48(3), pages 529-547.
    5. Piveteau, Paul & Smagghue, Gabriel, 2019. "Estimating firm product quality using trade data," Journal of International Economics, Elsevier, vol. 118(C), pages 217-232.
    6. Benkovskis, Konstantins & Wörz, Julia, 2018. "What drives the market share changes? Price versus non-price factors," Structural Change and Economic Dynamics, Elsevier, vol. 45(C), pages 9-29.
    7. Grant, Matthew & Soderbery, Anson, 2024. "Heteroskedastic supply and demand estimation: Analysis and testing," Journal of International Economics, Elsevier, vol. 150(C).
    8. Ralph Ossa, 2016. "Quantitative Models of Commercial Policy," NBER Working Papers 22062, National Bureau of Economic Research, Inc.
    9. Fontagné, Lionel & Guimbard, Houssein & Orefice, Gianluca, 2022. "Tariff-based product-level trade elasticities," Journal of International Economics, Elsevier, vol. 137(C).
    10. Colin J. Hottman & Ryan Monarch, 2018. "Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data," Working Papers 18-04, Center for Economic Studies, U.S. Census Bureau.
    11. Lichtenberg, Erik & Olson, Lars J., 2020. "Tariffs and the risk of invasive pest introductions in commodity imports: Theory and empirical evidence," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    12. Stephen J. Redding & David E. Weinstein, 2017. "Aggregating from Micro to Macro Patterns of Trade," NBER Working Papers 24051, National Bureau of Economic Research, Inc.
    13. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    14. Bolatto, Stefano & Moramarco, Graziano, 2023. "Gains from trade and their quantification: Does sectoral disaggregation matter?," International Economics, Elsevier, vol. 174(C), pages 44-68.
    15. Aoyagi, Takahide & Ito, Tadashi & Matsuura, Toshiyuki, 2022. "Welfare gains through globalization: Evidence from Japan's manufacturing sector," Journal of the Japanese and International Economies, Elsevier, vol. 64(C).
    16. Farrokhi, Farid, 2020. "Global sourcing in oil markets," Journal of International Economics, Elsevier, vol. 125(C).
    17. French, Scott, 2016. "The composition of trade flows and the aggregate effects of trade barriers," Journal of International Economics, Elsevier, vol. 98(C), pages 114-137.
    18. Alessia Camplomi & Harald Fadinger & Chiara Forlati & Sabine Stillger & Ulrich J. Wagner, 2024. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements: Theory and Evidence," CRC TR 224 Discussion Paper Series crctr224_2024_495v3, University of Bonn and University of Mannheim, Germany, revised Jul 2025.
    19. Gervais, Antoine, 2023. "Controlling for Exporter-Year Factors when Estimating Import-Demand Elasticities," MPRA Paper 117421, University Library of Munich, Germany.
    20. Konstantins Benkovskis & Julia Wörz, 2014. "“Made in China” – How Does it Affect Measures of Competitiveness?," Working Papers 193, Oesterreichische Nationalbank (Austrian Central Bank).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2607.19929. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.