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Overconfidence, Subjective Perception and Pricing Behavior

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  • Pierpaolo Benigno
  • Anastasios Karantounias

Abstract

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.

Suggested Citation

  • Pierpaolo Benigno & Anastasios Karantounias, 2006. "Overconfidence, Subjective Perception and Pricing Behavior," NBER Working Papers 11922, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11922
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    Cited by:

    1. Camille Cornand & Rodolphe Dos Santos Ferreira, 2021. "Central bank’s stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing," Working Papers 2118, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Barrero, Jose Maria, 2022. "The micro and macro of managerial beliefs," Journal of Financial Economics, Elsevier, vol. 143(2), pages 640-667.
    3. Xiao, Wei, 2022. "Understanding probabilistic expectations – a behavioral approach," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

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    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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