Overconfidence, Subjective Perception, and Pricing Behavior

50 Pages Posted: 3 Jan 2018 Last revised: 7 Jun 2019

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-11-01

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: (1) overconfident firms are less inclined to acquire information, and (2) prices might exhibit excess volatility driven by nonfundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility.

Keywords: overconfidence, imperfect common knowledge, information acquisition, inflation volatility

JEL Classification: D4, D8, E3

Suggested Citation

Benigno, Pierpaolo and Karantounias, Anastasios G., Overconfidence, Subjective Perception, and Pricing Behavior (2017-11-01). FRB Atlanta Working Paper No. 2017-14. Available at SSRN: https://ssrn.com/abstract=3092155

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Anastasios G. Karantounias

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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