Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty.
We propose a new theory of price rigidity based on firms' Knightian uncertainty about their competitive environment. This uncertainty has two key implications. First, firms learn about the shape of their demand function from past observations of quantities sold. This learning gives rise to kinks in...
| Published in: | Econometrica Vol. 88; no. 5; pp. 1899 - 1939 |
|---|---|
| Main Authors: | , , |
| Format: | Article |
| Published: |
Wiley-Blackwell
Sep2020
|
| Subjects: | |
| Online Access: | View this record in EBSCOhost |
| fields | @attributes: recordID: 1 pdfLink: plink: https://search.ebscohost.com/login.aspx?direct=true&db=ssf&AN=146079675&site=ehost-live header: @attributes: shortDbName: ssf uiTerm: 146079675 longDbName: Social Sciences Full Text (H.W. Wilson) uiTag: AN controlInfo: bkinfo: jinfo: jid: 00129682 ECN jtl: Econometrica issn: 00129682 maglogo: Y pubinfo: dt: Sep2020 vid: 88 iid: 5 pid: 480 pub: Wiley-Blackwell artinfo: ui: 146079675 10.3982/ECTA14234 ppf: 1899 ppct: 40 formats: tig: atl: Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty. aug: au: Ilut, Cosmin Valchev, Rosen Vincent, Nicolas affil: Economics Department, Duke University NBER Economics Department, Boston College Department of Applied Economics, HEC Montréal su: Uncertainty Microeconomics Fear Demand function sug: subj: Uncertainty Microeconomics Fear Demand function keyword: ambiguity aversion non‐parametric learning Price rigidity ambiguity aversion non‐parametric learning Price rigidity ab: We propose a new theory of price rigidity based on firms' Knightian uncertainty about their competitive environment. This uncertainty has two key implications. First, firms learn about the shape of their demand function from past observations of quantities sold. This learning gives rise to kinks in the expected profit function at previously observed prices, making those prices both sticky and more likely to reoccur. Second, uncertainty about the relationship between aggregate and industry‐level inflation generates nominal rigidity. We prove the main insights analytically and quantify the effects of our mechanism. Our estimated quantitative model is consistent with a wide range of micro‐level pricing facts that are typically challenging to match jointly. It also implies significantly more persistent monetary non‐neutrality than in standard models, allowing it to generate large real effects from nominal shocks. pubtype: Academic Journal doctype: Article src: R language: English refInfo: copyright: @attributes: flag: N holdings: @attributes: islocal: N |
|---|