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Pá 10.02.2012

Dr. Jean-Paul L’Huillier: “Consumers' Imperfect Information and Price Rigidities”

Dr. Jean-Paul L’Huillier

Einaudi Institute for Economics and Finance, Italy

Author: Jean-Paul L’Huillier

Abstract: 

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 are hump-shaped due to consumer learning.

Full Text: “Consumers' Imperfect Information and Price Rigidities”