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Price-setting with quadratic adjustment costs: Experimental evidence

Andreas Orland () and Michael W.M. Roos

Journal of Economic Behavior & Organization, 2019, vol. 163, issue C, 88-116

Abstract: We test the price-setting behavior of firms using the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). For our tests, we conducted experiments that adapt the model into an individual decision-making problem. We find systematic deviations in price-setting according to the subjects’ degree of information acquisition. Subjects rarely make use of past information. On the other hand, subjects that decide to acquire relatively little information about future desired prices tend to overweight their own past set price when they set prices. We study the impact of this heterogeneous price-setting behavior for theoretically derived forward-looking Phillips curves. Our estimated NKPCs are in line with the empirical literature. The deviations from theoretical predictions in our NKPCs are driven by the less-informed subjects.

Keywords: Experimental macroeconomics; Intertemporal optimization; Nominal frictions; Phillips curve (search for similar items in EconPapers)
JEL-codes: C91 D92 E52 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:163:y:2019:i:c:p:88-116

DOI: 10.1016/j.jebo.2019.05.010

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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