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Institutional Affiliation: Federal Resrve Bank of Atlanta
Information about this author at RePEc
NBER Working Papers and Publications
|January 2006||Overconfidence, Subjective Perception and Pricing Behavior|
with : w11922
We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the economy. However, we allow firms to obtain information by paying a fixed cost. We find two important implications: i) overconfident firms are less inclined to acquire information; ii) prices might exhibit excess volatility driven by non-fundamental disturbances. We use our model to match some facts related to recent empirical evidence on disaggregated price data for the US economy.