Overconfidence, Subjective Perception and Pricing Behavior

Pierpaolo Benigno and Anastasios Karantounias

No 11922, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D4 D8 E3 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-mac and nep-mic
Note: ME
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Published as Benigno, Pierpaolo & Karantounias, Anastasios G., 2019. "Overconfidence, subjective perception and pricing behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 107-132.

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Related works:
Journal Article: Overconfidence, subjective perception and pricing behavior (2019)
Working Paper: Overconfidence, Subjective Perception, and Pricing Behavior (2017)
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