Rational inattention, misallocation, and the aggregate economy

Recent research focuses on how the limitations in information processing by firm managers impact production decisions, resource allocation, and the overall economy. Managers have a limited capacity to process information, which affects their ability to handle uncertainty from both firm-specific and economy-wide shocks. Findings suggest that increased uncertainty at the aggregate level leads to a shift in capacity allocation, resulting in resource misallocation and lower output. On the other hand, idiosyncratic uncertainty has a non-monotonic effect on aggregate productivity. Empirically, findings provide new insights into the relationship between inputs and labor productivity.

Image courtesy of interviewee. December 21, 2023

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