TY  - JOUR
AU  - Reis,Ricardo
TI  - Inattentive Producers
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11820
PY  - 2005
Y2  - December 2005
UR  - http://www.nber.org/papers/w11820
L1  - http://www.nber.org/papers/w11820.pdf
N1  - Author contact info:
Ricardo Reis
Department of Economics, MC 3308
Columbia University
420 West 118th Street, Rm. 1022 IAB
New York  NY  10027
Tel: 212-851-4007
Fax: 212-854-8059
E-Mail: rreis@columbia.edu
AB  - 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.
ER  -