Overconfidence, subjective perception and pricing behavior

Pierpaolo Benigno and Anastasios Karantounias

Journal of Economic Behavior & Organization, 2019, vol. 164, issue C, 107-132

Abstract: We study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information. Our price-setters overestimate their abilities to infer aggregate shocks from private signals. The fraction of uninformed firms is endogenous; firms can obtain information by paying a fixed cost. We find two results: i) overconfident firms are less inclined to acquire information relative to the rational benchmark; ii) prices might exhibit excess volatility driven by non-fundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility.

Keywords: Overconfidence; Overprecision; Imperfect common knowledge; Information acquisition; Inflation volatility (search for similar items in EconPapers)
JEL-codes: D4 D8 E3 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Overconfidence, Subjective Perception, and Pricing Behavior (2017)
Working Paper: Overconfidence, Subjective Perception and Pricing Behavior (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:164:y:2019:i:c:p:107-132

DOI: 10.1016/j.jebo.2019.05.029

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