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Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms

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  • Weinrich, Gerd
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    Abstract

    A risk-averse price-setting firm which knows the quantity demanded at the status quo price but has imperfect information otherwise may choose not to change it although an otherwise identical risk-neutral firm would do so, provided the variance of the firm's subjective probability distribution over quantities demanded as a function of price displays a kink at the status quo. This is equivalent to risk aversion of order one. When no such endogenous fixprice exists, the size of price adjustment still tends to zero as risk aversion tends to infinity, and to any arbitrarily small menu cost there exists a degree of risk aversion so that the firm will not adjust.

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    File URL: http://mpra.ub.uni-muenchen.de/6302/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6302.

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    Date of creation: 1997
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    Handle: RePEc:pra:mprapa:6302

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    Related research

    Keywords: fixed prices; price adjustment; risk aversion; menu cost;

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    1. Dreze, Jacques H., 1979. "Demand estimation, risk-aversion and sticky prices," Economics Letters, Elsevier, Elsevier, vol. 4(1), pages 1-6.
    2. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(5), pages 823-38, Supp..
    3. Deaton, A. S., 1975. "The measurement of income and price elasticities," European Economic Review, Elsevier, Elsevier, vol. 6(3), pages 261-273, July.
    4. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 637-58, September.
    5. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
    6. Frank, Jeff, 1990. "Monopolistic Competition, Risk Aversion, and Equilibrium Recessions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(4), pages 921-38, November.
    7. Allen, Franklin, 1988. "A Theory of Price Rigidities when Quality is Unobservable," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(1), pages 139-51, January.
    8. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 71(2), pages 301-07, May.
    9. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers, UCLA Department of Economics 540, UCLA Department of Economics.
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    Cited by:
    1. Bignami, Fernando & Colombo, Luca & Weinrich, Gerd, 2004. "Complex business cycles and recurrent unemployment in a non-Walrasian macroeconomic model," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 53(2), pages 173-191, February.
    2. Luca Colombo and Gerd Weinrich, 2001. "The Phillips Curve as a Long-Run Phenomenon in a Macroeconomic Model with Complex Dynamics," Computing in Economics and Finance 2001, Society for Computational Economics 13, Society for Computational Economics.
    3. Luca Colombo & G. Weinrich & F. Bignami, 2000. "A Dynamic Non-Tatonnement Macroeconomic Model With Stochastic Rationing," Computing in Economics and Finance 2000, Society for Computational Economics 198, Society for Computational Economics.

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