This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices,...

This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate...

In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly...

This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of...

Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, The Philadelphia Fed Policy Forum: Policy Lessons from the Economic and Financial Crisis, December 4, 2009

Empirical evidence on developing countries highlights that poor farm-households are less keen to adopt high risk / high return technologies than rich households. Yet, they tend to be more vulnerable to income shocks than the rich. This paper develops a model of informal risk-sharing with...

Moral hazard and adverse selection impede the development of formal crop insurance markets in developing countries. Besides, the risk mitigation provided by informal risk-sharing arrangements is restricted by their inability to protect against covariate shocks. In this context, index-based...