Attention Cycles

140 Pages Posted: 14 May 2020 Last revised: 15 Aug 2022

See all articles by Joel P. Flynn

Joel P. Flynn

Massachusetts Institute of Technology (MIT) - Department of Economics

Karthik Sastry

Harvard University, Department of Economics

Date Written: August 12, 2022

Abstract

We document that, in aggregate downturns, US public firms’ attention to macroeconomic conditions rises and the size of their input-choice mistakes falls. We explain these phenomena with a business-cycle model in which firms face a cognitive cost of making precise decisions. Because firms are owned by risk-averse households, there are greater incentives to deliver profits by making smaller input-choice mistakes when aggregate consumption is low. In the data, consistent with our model, financial markets punish mistakes more in downturns and macroeconomically attentive firms make smaller mistakes. Quantitatively, attention cycles generate asymmetric, state-dependent shock propagation and stochastic volatility of output growth.

Keywords: Business Cycles, Attention, Information, Shock Propagation, Volatility

JEL Classification: E32, E44, E71, D83

Suggested Citation

Flynn, Joel P. and Sastry, Karthik, Attention Cycles (August 12, 2022). Available at SSRN: https://ssrn.com/abstract=3592107 or http://dx.doi.org/10.2139/ssrn.3592107

Joel P. Flynn (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Karthik Sastry

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
299
Abstract Views
1,451
rank
145,458
PlumX Metrics