FOCUS OR FLEXIBILITY? A FRAMEWORK FOR UNDERSTANDING HOW FIRMS PROCESS TASK-RELEVANT INFORMATION

Abstract

This paper presents a model of a firm’s attention-allocation decision in which a firm can adopt realistic attention strategies. The first strategy, monitoring, allows the firm to detect if information is relevant before paying attention to it. The second, specialization, permits the firm to process information perfectly without using attention resources. Both strategies require fixed costs, and therefore are only adopted when the expected benefits exceed the costs. I find that the firm chooses to specialize in highly important and consistently relevant information and monitor highly important, but rarely relevant information. These findings suggest that firms react to infrequent, but important economic events—like monetary policy changes—more effectively than current models of attention predict.