Regular Adjustment - Theory and Evidenc

F. Rumler J. Konieczny ()
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F. Rumler J. Konieczny: Wilfrid Laurier University, https://www.wlu.ca/academics/faculties/lazaridis-school-of-business-and-economics/faculty-profiles/jurek-konieczny/index.html
Authors registered in the RePEc Author Service: Fabio Rumler and Jerzy D. Konieczny

Working Papers from Wilfrid Laurier University, Department of Economics

Abstract: We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks, etc.) or on a state-regular basis (e.g. change an interest rate by 0.25%, etc.), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. The reasons for this heterogeneity are discussed. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. In general, however, there is no clear relationship between the degree of cost and benefit function heterogeneity and the incidence of regular adjustment. We provide sufficient conditions under which the less frequent are adjustments, the greater is the incidence of regular policies. To test the model we use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. The results provide strong support for the model: the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment.

Keywords: Optimal pricing; attractive prices; menu costs (search for similar items in EconPapers)
JEL-codes: D01 E31 E52 L11 (search for similar items in EconPapers)
Pages: 51
Date: 2006, Revised 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Regular adjustment: theory and evidence (2006)
Working Paper: Regular Adjustment: Theory and Evidence (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wlu:wpaper:eg0055

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