Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms
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.
|Date of creation:||1997|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
- Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-307, May.
- Segal, Uzi & Spivak, Avia, 1990.
"First order versus second order risk aversion,"
Journal of Economic Theory,
Elsevier, vol. 51(1), pages 111-125, June.
- Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers 540, UCLA Department of Economics.
- Deaton, A. S., 1975. "The measurement of income and price elasticities," European Economic Review, Elsevier, vol. 6(3), pages 261-273, July.
- Dreze, Jacques H., 1979. "Demand estimation, risk-aversion and sticky prices," Economics Letters, Elsevier, vol. 4(1), pages 1-6.
- Franklin Allen, 1988. "A Theory of Price Rigidities When Quality is Unobservable," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 139-151.
- Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
- Jeff Frank, 1990. "Monopolistic Competition, Risk Aversion, and Equilibrium Recessions," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 921-938.
- Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:6302. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.