Information Acquisition and Nominal Price Adjustment

The role of asymmetric information and the incentive to acquire information is considered for a monopolistically competitive economy. To focus on nominal rigidities, the money stock is the only state variable, and it is shown how informational problems can cause nominal price rigidities. Under an asymmetric information structure it is found that uninformed firms have a disproportionate large effect on aggregate prices, reinforcing the nominal rigidities caused by some firms being uninformed. Endogenizing the information structure shows as expected that for sufficiently small information costs all firms acquire information while for sufficiently large costs all firms stay uninformed. More interesting it is also found that strategic complementaries in price-setting may cause either multiple equilibria for the information acquisition problem or preclude existence of equilibrium.