Information Acquisition and Price Setting under Uncertainty: New survey evidence

While it is commonly understood that prices adjust only sluggishly to changes in economic conditions, the source of sluggish price adjustment is under-explored empirically. In this paper, we argue that sluggish information updating drives price stickiness by using a firm-level panel dataset containing information on expectations and price adjustments. We find a positive correlation between the forecast revision and price adjustment, and between the frequency of belief updating and the volatility (i.e., uncertainty) of sales growth. Moreover, we find that both the frequency and sensitivity of price adjustment to belief updating increase, when volatility of sales growth increases. We set up a menu cost model with second moment shocks that highlight the firm's state-dependent decision of information acquisition to rationalize the above findings. In addition, the calibrated model shows that the degree of monetary non-neutrality is higher in our model than in the perfect information model and the difference in the degree of monetary non-neutrality (between the low and high uncertainty states) is larger in our model compared with the perfect information menu cost model (i.e., Vavra (2013)).