This planning grant research will extend a study done in the investigator's University of Chicago 1989 dissertation. That dissertation examined the impact of differing market structures on the price adjustment behavior of commercial banks. The major findings of that dissertation were: (1) a major proportion of the differences in pricing rigidity (or behavior) was not explained by differences in market structure, and (2) intramarket variation in the price rigidity patterns of individual firms was very significant. This latter finding motivated a search for a theory to explain intramarket, or firm specific, price adjustment behavior, and led to a consideration of the "New Keynesian" economics literature on imperfect competition and costly price adjustment. Most of this existing literature has focussed exclusively on "market" characteristics to explain differences in price rigidity patterns. This project will focus on "firm" characteristics as the relevant variable in analyzing the price adjustment behavior of firms. This extension from market to firm specific analysis is very important in understanding and identifying the causes of sticky prices. As such, it is also crucial for developing a complete analysis of the economy-wide misallocation of resources imposed by wage and price rigidities. Specifically, the award will be used to: (1) review the price rigidity literature, (2) develop testable hypotheses about firm specific costs of price adjustment, and (3) begin developing tractable empirical models to test these hypotheses. These models will focus on commercial banks and their role as financial intermediaries. However, the results will have implications for other industries, and the economy as a whole.
