TY - JOUR A1 - Snower, Dennis A1 - Ahrens, Steffen T1 - Envy, Guilt, and the Phillips Curve JF - Journal of Economic Behavior & Organization N2 - We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and the latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent. KW - inflation; long-run Phillips curve; fairness; inequity aversion Y1 - 2014 UR - https://econpapers.repec.org/RePEc:zbw:cauewp:201201 VL - 99 IS - C SP - 69 EP - 84 ER - TY - JOUR A1 - Snower, Dennis A1 - Ahrens, Steffen A1 - Pirschel, Inske T1 - A Theory of Price Adjustment under Loss Aversion JF - Journal of Economic Behavior & Organization N2 - We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers’ perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers’ rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that – in line with the empirical evidence – prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks. The degree of these asymmetries, in turn, depends on the size of the shock. KW - Price sluggishness Loss aversion State-dependent pricing Y1 - 2017 U6 - https://doi.org/10.1016/j.jebo.2016.12.008 VL - 134 SP - 78 EP - 95 ER -