Transitory shocks, limited attention, and a firm’s decision to exit

Avi Goldfarb, Mo Xiao

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This paper investigates the incidence of limited attention in a high-stakes business setting: a bar owner may be unable to purge transitory shocks from noisy profit signals when deciding whether to exit. Combining a 24-year monthly panel on the alcohol revenues from every bar in Texas with weather data, we find suggestive evidence that inexperienced, distantly located owners may overreact to the transitory component of revenue relative to the persistent component. This apparent asymmetric response is muted under higher revenue fluctuations. We formulate and estimate a structural model to endogenize attention allocation by owners with different thinking cost. Under the assumptions of the model, we find that 3.9% bars make incorrect exit decisions due to limited attention. As exits are irreversible, permanent decisions, small mistakes at the margin interpreting profit signals can lead to large welfare losses for entrepreneurs.

Original languageEnglish (US)
Pages (from-to)223-255
Number of pages33
JournalQuantitative Marketing and Economics
Volume22
Issue number3
DOIs
StatePublished - Sep 2024

Keywords

  • Behavioral industrial organization
  • Bounded rationality
  • D9
  • Exit
  • Inattention
  • L2
  • L8

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)
  • Marketing

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