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Overconfidence, subjective perception and pricing behavior

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  • Benigno, Pierpaolo
  • Karantounias, Anastasios G.

Abstract

We study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information. Our price-setters overestimate their abilities to infer aggregate shocks from private signals. The fraction of uninformed firms is endogenous; firms can obtain information by paying a fixed cost. We find two results: i) overconfident firms are less inclined to acquire information relative to the rational benchmark; ii) prices might exhibit excess volatility driven by non-fundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility.

Suggested Citation

  • Benigno, Pierpaolo & Karantounias, Anastasios G., 2019. "Overconfidence, subjective perception and pricing behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 107-132.
  • Handle: RePEc:eee:jeborg:v:164:y:2019:i:c:p:107-132
    DOI: 10.1016/j.jebo.2019.05.029
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    More about this item

    Keywords

    Overconfidence; Overprecision; Imperfect common knowledge; Information acquisition; Inflation volatility;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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