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Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms

  • Weinrich, Gerd
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    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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    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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    1. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
    2. Deaton, A. S., 1975. "The measurement of income and price elasticities," European Economic Review, Elsevier, vol. 6(3), pages 261-273, July.
    3. 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, vol. 100(5), pages 823-38, Supp..
    4. Allen, Franklin, 1988. "A Theory of Price Rigidities when Quality is Unobservable," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 139-51, January.
    5. Frank, Jeff, 1990. "Monopolistic Competition, Risk Aversion, and Equilibrium Recessions," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 921-38, November.
    6. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
    7. Dreze, Jacques H., 1979. "Demand estimation, risk-aversion and sticky prices," Economics Letters, Elsevier, vol. 4(1), pages 1-6.
    8. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
    9. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
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