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Inattentive Economies

George-Marios Angeletos, Karthik Sastry

NBER Working Paper No. 26413
Issued in October 2019, Revised in December 2019
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

We study the efficiency of competitive markets when people are rationally inattentive. Appropriate amendments of the Welfare Theorems hold if attention costs satisfy an invariance condition, which amounts to free disposal of decision-irrelevant aspects of the state of nature. This condition is satisfied by the Shannon mutual information formulation of attention costs. More generally, inefficiency emerges and Hayek’s (1945) argument about the informational optimality of prices fails. Markets are the best means of allocating scarce attention when agents gain nothing from directly contemplating prices rather than the entire state of nature.

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Document Object Identifier (DOI): 10.3386/w26413

 
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