Endogenous Search, Price Dispersion, and Welfare

Liang Wang

No 201429, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous price dispersion, which is generated by sellers posting prices and buyers costly searching for low prices. We identify three channels through which inflation affects welfare. The interaction of real balance channel and price posting channel generates a welfare cost, at 10% annual inflation, equal to 3.23% of steady state consumption; if either channel is shut down, the welfare cost decreases to less than 0.15%. Search channel reduces welfare cost by more than 50%. The aggregate effect of inflation on welfare is nonmonotonic.

Keywords: Nash Bargaining; Competitive Search; Indivisibility; Multiplicity; Uniqueness (search for similar items in EconPapers)
JEL-codes: D51 E40 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://www.economics.hawaii.edu/research/workingpapers/WP_14-29.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Endogenous search, price dispersion, and welfare (2016)
Working Paper: Endogenous Search, Price Dispersion, and Welfare (2016)
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