Macroeconomic Dynamics

Articles

INFLATION AND QUALITY DISPERSION

Richard Dutua1 c1

World Bank and Deakin Graduate School of Business

Abstract

One questionable aspect of price posting with directed search is the strong commitment by sellers to commit to the advertised terms of trade. In this paper I explore the welfare implications of assuming that sellers cannot commit and vary the quality of their output ex post according to realized demand. I show that such lack of commitment translates into lower participation by buyers, lower average quality, and a consumption-equivalent loss of 0.3% of annual GDP.

Keywords:

  • Directed Search;
  • Commitment;
  • Quality;
  • Welfare

Correspondence

Address correspondence to: Richard Dutu, Deakin Graduate School of Business, 221 Burwood Highway, 3125 Burwood, Victoria, Australia; e-mail: rdutu@deakin.edu.au.

Footnotes

  I wish to thank an anonymous referee, Pedro Gomis-Porqueras, Benoît Julien, Ian King, Guillaume Rocheteau and John Tressler for very helpful discussions. I also thank the seminar participants at the Bank of Canada, the Cleveland Fed, the Canadian Economics Association Meeting, the Workshop on Macroeconomic Dynamics in Melbourne and the universities of Melbourne and Paris West. All errors are mine.

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