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Consumers' Imperfect Information and Price Rigidities

  • Jean-Paul L'Huillier

    (Einaudi Institute for Economics and Fina)

This paper develops a model of price rigidities and information diffusion in decentralized markets with private information. First, I provide a strategic microfoundation for price rigidities, by showing that firms are better off delaying the adjustment of prices when they face a high number of uninformed consumers. Second, in an environment where consumers learn from firms' prices, the diffusion of information follows a Bernoulli differential equation. Therefore, learning follows nonlinear dynamics. Third, the price rigidity produces an informational externality that affects welfare. Fourth, the dynamics of output and inflation are hump-shaped due to consumer learning.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_65.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 65.

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Date of creation: 2013
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Handle: RePEc:red:sed013:65
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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