Inflation and Price Dispersion : Evidence from the Brazilian Stabilization Program

The paper considers the question of information imperfections. The aim is to prove the hypothesis that economic agents make decisions based on imperfect information. In order to do so, it uses correlation between a measure of price dispersion and inflation rates, which are a proxy of the information stock held by agents. Those in favor of the perfectly informed agents theory argue that price dispersion reflects perceived differences in factors like quality, location, market structure and service agreement. If this is correct, changes in price dispersion would occur only if there were changes in these factors. If they are not altered and price dispersion changes, one can come to the conclusion that other factors cause the dispersion. A change in the inflation level brings a good opportunity to look for the other factors. If price dispersion is higher during periods of high inflation rates, this means that the information stock held by agents is one of its determinants. This is due to the hypothesis that the inflation rate is a good proxy of the information stock held by economic agents. Theoretical arguments linking higher inflation to lower information stock are also presented in the paper. So, it can be argued that price dispersion exists partly due to the presence of imperfectly informed agents. A proof for this argument is that price dispersion is higher when the information stock is lower (inflation rates are higher)