Working Paper

Asymmetric firm dynamics under rational inattention

Abstract: We study the link between business failures, markups and business cycle asymmetry in the U.S. economy with a model of optimal firm exit under rational inattention. We show that the model's predictions of lagged, counter-cyclical and positively skewed markups together with counter-cyclical exit rates are consistent with the empirical evidence. Moreover, our model uncovers a new mechanism that links information processing with the business cycle. It predicts counter-cyclical attention to economic conditions consistent with survey evidence.

Keywords: Information; markups; exit rates; rational inattention;

JEL Classification: C63; D21; D22; D80; E32;

https://doi.org/10.24149/wp1411

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2014-10-01

Number: 1411