We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging...

The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital...

This paper offers an explanation for the persistence observed in real exchange rate movements. The model combines pricing to market behavior with sticky prices generated by staggered contracts. A translog preference structure is sued to enhance both features. The paper finds that openness limits...

Risk adjustment of payments to health plans is fundamental to regulated competition among private insurers, which serves as the basis of national health policy in many countries. To date, estimation and evaluation of a risk adjustment model has been a two-step process. In a first step, the...

The purchasing power parity puzzle relates to the adjustment of real exchange rates. Real exchange rates are extremely volatile, suggesting that temporary shocks emanate from the monetary sector. But the half-life of real exchange rate deviations is extremely large -- 2.5 to 5 years. This...

We show that deviations from long-run stability of product prices are optimal in the presence of endogenous producer entry and product variety in a sticky-price model with monopolistic competition in which price stability would be optimal in the absence of entry. Specifically, a long-run...

What drives countercyclical volatility? A large literature has documented that many economic variables are more disperse in recessions, but this could either occur because shocks get bigger or because firms respond more to shocks which are the same size. Existing evidence that the dispersion of...

This paper examines how to evaluate consumer welfare when consumers face nonlinear prices. This problem arises in many settings, such as devising optimal pricing strategies for firms, assessing how price discrimination affects consumers, and evaluating the efficiency costs of many transfer...

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical...

In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our...