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Attention misallocation, social welfare and policy implications

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  • Chen, Heng
  • Luo, Yulei
  • Pei, Guangyu

Abstract

We examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern. In this setting, the attention allocation may not be monotone in endowed attention capacity. Agents may decrease their attention on or even ignore the more accurate signal when capacity increases. As a result, social welfare may decrease when they have more attention to process information. And it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.

Suggested Citation

  • Chen, Heng & Luo, Yulei & Pei, Guangyu, 2015. "Attention misallocation, social welfare and policy implications," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 37-57.
  • Handle: RePEc:eee:dyncon:v:59:y:2015:i:c:p:37-57
    DOI: 10.1016/j.jedc.2015.05.003
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    1. Ellison, Martin & Macaulay, Alistair, 2021. "A rational inattention unemployment trap," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    Coordination game; Social welfare; Rational inattention;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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