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Overconfidence, Subjective Perception and Pricing Behavior

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  • Pierpaolo Benigno
  • Anastasios Karantounias

Abstract

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.

Suggested Citation

  • Pierpaolo Benigno & Anastasios Karantounias, 2006. "Overconfidence, Subjective Perception and Pricing Behavior," NBER Working Papers 11922, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11922
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    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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