State-Dependent Attention and Pricing Decisions
Abstract
This paper studies price-setting decisions under rational inatten-tion. Prices are set by tracking an unobserved target whose distri-bution is also unknown. Information acquisition is dynamic and fully flexible 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 distribu-tion. 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. (JEL D21, D82, D83, E32, L11, L25)