We study the link between asymmetries of markups and firm exit rates and asymmetries in information acquisition along the U.S. business cycle. We argue that a model of optimal firm exit under rational inattention produces lagged,... more
We study the link between asymmetries of markups and firm exit rates and asymmetries in information acquisition along the U.S. business cycle. We argue that a model of optimal firm exit under rational inattention produces lagged, counter-cyclical and positively skewed markups together with counter-cyclical exit rates, consistent with the empirical evidence. Our model also predicts counter-cyclical information rigidities consistent with survey evidence.
We present a theory of discrete choice with information costs that supports deliberate stochastic choice. We use a unique experimental dataset to distinguish between errors arising from limitations on a decision maker's cognitive... more
We present a theory of discrete choice with information costs that supports deliberate stochastic choice. We use a unique experimental dataset to distinguish between errors arising from limitations on a decision maker's cognitive abilities and conscious disregard of information. Experimental evidence strongly favors the latter explanation. The data also allows us to directly estimate the shape and size of information costs for individual participants. Furthermore, in line with a dynamic extension of our theory, we find that accumulated knowledge of the environment improves response consistency. JEL: D81, D03, C91, C44.
What do firms learn from their interactions in markets, and what are the implications for aggregate dynamics? We address this question in a multi-sector real-business cycle model with a sparse input-output structure. In each sector, firms... more
What do firms learn from their interactions in markets, and what are the implications for aggregate dynamics? We address this question in a multi-sector real-business cycle model with a sparse input-output structure. In each sector, firms observe their own productivity, along with the prices of their inputs and the price of their output. We show that general equilibrium market-clearing conditions constrain average expectations and characterize a set of cases where average expectations, and therefore average dynamics, are exactly those of the full-information model. This "aggregate irrelevance" of information can occur even when sectoral expectations and dynamics are quite different under partial information, and despite the fact that each sector represents a non-negligible portion of the overall economy. Using sectoral data from the United States, we show that the conditions for aggregate irrelevance of information are far from being met in practice, yet the aggregate dyna...
