Working Paper: NBER ID: w11922
Authors: Pierpaolo Benigno; Anastasios G. Karantounias
Abstract: We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the economy. However, we allow firms to obtain information by paying a fixed cost. We find two important implications: i) overconfident firms are less inclined to acquire information; ii) prices might exhibit excess volatility driven by non-fundamental disturbances. We use our model to match some facts related to recent empirical evidence on disaggregated price data for the US economy.
Keywords: No keywords provided
JEL Codes: D4; D8; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm overconfidence (L21) | information acquisition (D83) |
| non-fundamental disturbances (E32) | price volatility (G13) |
| firm overconfidence (L21) | price volatility (G13) |