NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Overconfidence, Subjective Perception and Pricing Behavior

Pierpaolo Benigno, Anastasios Karantounias

NBER Working Paper No. 11922
Issued in January 2006
NBER Program(s):   ME

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.

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This paper was revised on March 10, 2006

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Document Object Identifier (DOI): 10.3386/w11922

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