Price Setting, Price Dispersion, and the Value of Money - or The Law of Two Prices

Curtis, Elisabeth Soller; Wright, Randall

doi:10.2139/ssrn.339200

Cited by 11 publications

(20 citation statements)

References 16 publications

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“…As we said, no firm posts anything other than one of the K reservation wages. Following Curtis and Wright (2004), one can strengthen this to show that generically there are no more than two wages posted.…”

Section: The Modelmentioning

confidence: 93%

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Equilibrium Wage Dispersion: An Example

Gaumont¹,

Schindler²,

Wright³

2006

Topics in Macroeconomics

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This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.Search models with posting and match-specific heterogeneity generate wage dispersion. Given K values for the match-specific variable, it is known that there are K reservation wages that could be posted, but generically never more than two actually are posted in equilibrium. What is unknown is when we get two wages, and which wages are actually posted. For an example with K = 3, we show equilibrium is unique; may have one wage or two; and when there are two, the equilibrium can display any combination of posted reservation wages, depending on parameters. We also show how wages, profits, and unemployment depend on productivity.JEL Classification Numbers: D83, E24, J31, J63

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Section: The Modelmentioning

confidence: 93%

“…In particular, they do not "unravel" with the introduction of small but positive search costs. Although they do admit deviations from the law of one price, however, models with ex post heterogeneity are bound by the law of two prices (Curtis and Wright, 2004).…”

Section: Introductionmentioning

confidence: 99%

Equilibrium Wage Dispersion: An Example

Gaumont¹,

Schindler²,

Wright³

2006

Topics in Macroeconomics

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“…In particular, if sellers have the power to propose prices and quantities and buyers can only decide whether or not to trade, most search models of money do not have a monetary equilibrium (see Curtis and Wright, 2003). This result follows from the fact that, by the time trading takes place, the buyer cannot adjust its money holdings and hence the sellers can extract all the surplus from trade.…”

Section: Introductionmentioning

confidence: 99%

“…In particular, the distribution only has two mass points (zero and a positive number). 3 More interestingly, not only is the positive mass-point endogenous (the intensive margin), but also the mass that the distribution puts in each point will depend on equilibrium outcomes (the extensive margin). 4 For example, the level 2 This is the kind of preference shocks used by Curtis and Wright (2003) 4 There are other papers using the Lagos-Wright approach that incorporate extensive margin effects.…”

Section: Introductionmentioning

confidence: 99%

“…3 More interestingly, not only is the positive mass-point endogenous (the intensive margin), but also the mass that the distribution puts in each point will depend on equilibrium outcomes (the extensive margin). 4 For example, the level 2 This is the kind of preference shocks used by Curtis and Wright (2003) 4 There are other papers using the Lagos-Wright approach that incorporate extensive margin effects. Rocheteau and Wright (2004) assume that α, the probability of getting matched in the decentralized market, is a function 3 of expected inflation in the economy will determine the proportion of agents that participate as potential buyers in the decentralized market and the amount of money that those agents take to that market.…”

Section: Introductionmentioning

confidence: 99%

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Search, money, and inflation under private information

Ennis

2008

Journal of Economic Theory

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_____________________________________________________________I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright's model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. ______________________________________________________________________________

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Money and price posting under private information

Jiang

2014

Journal of Economic Theory

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We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high enough preferences. As their preferences are higher, they spend more till they become cash constrained. Since inflation reduces the future purchasing power of money and the value of retaining money, buyers tend to spend their money faster in response to higher inflation. In particular, more buyers choose to spend money and buyers spend on average a higher fraction of their money. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin.

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Price Setting, Price Dispersion, and the Value of Money - or The Law of Two Prices

Cited by 11 publications

References 16 publications

Equilibrium Wage Dispersion: An Example

Equilibrium Wage Dispersion: An Example

Search, money, and inflation under private information

Money and price posting under private information

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