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Attention misallocation, social welfare and policy implications


Luo, Yulei; Chen, Heng; Pei, Guangyu (2015). Attention misallocation, social welfare and policy implications. Journal of Economic Dynamics and Control, 59:37-57.

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.

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.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Coordination game, social welfare, rational inattention
Language:English
Date:October 2015
Deposited On:02 Sep 2015 16:02
Last Modified:08 Dec 2017 13:03
Publisher:Elsevier
ISSN:0165-1889
Publisher DOI:https://doi.org/10.1016/j.jedc.2015.05.003

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Embargo till: 2018-05-15