Behavioral sticky prices

Sérgio Rebelo

doi:10.1016/j.jmoneco.2025.103828

Behavioral sticky prices

2025-09-24

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DOI：10.1016/j.jmoneco.2025.103828

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• We propose a model in which households employ a dual-process model of decision-making. In familiar contexts, households use System 1, which is fast but prone to errors. In unfamiliar contexts, households use System 2, which is more accurate but involves cognitive costs. • Monopolistic firms strategically stabilize prices to keep consumers in System 1, creating a new source of price inertia. • We provide a behavioral foundation for three key empirical regularities: • the “rockets and feathers” pattern (prices rise quickly but fall slowly), • the “sticky winners” phenomenon (firms with unexpectedly high demand avoid changing prices), and • downward-sloping price hazard functions within product categories. • In our model, price stability is not optimal: deflation can improve efficiency by counteracting consumption errors.

Behavioral sticky prices

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