This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real “menu cost.†We calibrate this cost and the variance and autocorrelation of the...

This paper proposes a new theory of the size distributions of business firms. It postulates an underlying distribution of persons by managerial "talent" and then studies the division of persons into managers and employees and the allocation of productive factors across managers. The implications...

For a Markov decision problem in which unknown transition probabilities serve as hidden state variables, we study the quality of two approximations to the decision rule of a Bayesian who each period updates his subjective distribu- tion over the transition probabilities by Bayes’ law. The...