State-Dependent Attention and Pricing Decisions
American Economic Journal: Macroeconomics
Abstract: This paper studies price-setting decisions under Rational Inattention. Prices are set by tracking an unobserved target whose distribution is also unknown. Information acquisition is dynamic and fully exible since, given information acquired previously, price-setters choose the amount of information they collect as well as how they want to learn about both the outcome and its distribution. We show that by allowing for
imperfect information to be the unique source of rigidity, the model can reconcile stylized facts in the microeconomic evidence on price setting while simultaneously being consistent with empirical results on state-dependent attention.