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Price-setting with quadratic adjustment costs: Experimental evidence

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  • Orland, Andreas
  • Roos, Michael W.M.

Abstract

We test the price-setting behavior of firms using the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). For our tests, we conducted experiments that adapt the model into an individual decision-making problem. We find systematic deviations in price-setting according to the subjects’ degree of information acquisition. Subjects rarely make use of past information. On the other hand, subjects that decide to acquire relatively little information about future desired prices tend to overweight their own past set price when they set prices. We study the impact of this heterogeneous price-setting behavior for theoretically derived forward-looking Phillips curves. Our estimated NKPCs are in line with the empirical literature. The deviations from theoretical predictions in our NKPCs are driven by the less-informed subjects.

Suggested Citation

  • Orland, Andreas & Roos, Michael W.M., 2019. "Price-setting with quadratic adjustment costs: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 88-116.
  • Handle: RePEc:eee:jeborg:v:163:y:2019:i:c:p:88-116
    DOI: 10.1016/j.jebo.2019.05.010
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    More about this item

    Keywords

    Experimental macroeconomics; Intertemporal optimization; Nominal frictions; Phillips curve;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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