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Overconfidence, Subjective Perception, and Pricing Behavior

Pierpaolo Benigno and Anastasios Karantounias ()

No 2017-14, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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: (1) overconfident firms are less inclined to acquire information, and (2) prices might exhibit excess volatility driven by nonfundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility.

Keywords: overconfidence; imperfect common knowledge; information acquisition; inflation volatility (search for similar items in EconPapers)
JEL-codes: D4 D8 E3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mac
Date: 2017-11-01
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Working Paper: Overconfidence, Subjective Perception and Pricing Behavior (2006) Downloads
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