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Federal Reserve Bank of Dallas
Working Papers
Asymmetric firm dynamics under rational inattention
Anton A. Cheremukhin
Antonella Tutino
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.


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Anton A. Cheremukhin & Antonella Tutino, Asymmetric firm dynamics under rational inattention, Federal Reserve Bank of Dallas, Working Papers 1411, 01 Oct 2014.
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Keywords: Information; markups; exit rates; rational inattention.
DOI: 10.24149/wp1411
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