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

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

https://doi.org/10.24149/wp1411

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Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2014-10-01

Number: 1411

Pages: 76 pages