Time: 10:00 am - 11:30 am, Dec. 19th, 2025
Speaker: Shihan Shen (Rice University)
Venue: Zhifuxuan Classroom, Langrun Garden, Peking University
Abstract:
This paper studies the effect of inflation on consumers' search behavior and firms' pricing strategies and market power in goods markets, in order to quantify the welfare effects of inflation. In the model, households face uninsurable, idiosyncratic income and expenditure risk and smooth consumption by accumulating liquid wealth. Search in the goods market is random and households choose ex-ante search effort to find low price offers, as in Burdett and Judd (1983). In addition, given a set of offers, households have the outside option to continue searching ex-post. In equilibrium, households with heterogeneous wealth and income choose different search strategies. Heterogeneity in ex-ante search effort implies the composition of households differs along the price distribution. Heterogeneity in ex-post search decisions, along with heterogeneity in the marginal value of wealth, gives rise to heterogeneity in the elasticity of demand at a given price and firm's market power. Anticipated inflation affects market power according to three primary channels. First, inflation lowers the real return on wealth that increases all households' price sensitivity, lowering market power. Second, a lower return on wealth increases the costs of ex-post search that reduces consumers' outside option, increasing market power. Third, inflation affects price dispersion and households' incentive to search ex-ante. We quantify how these channels affect households unevenly across the wealth and income distribution, and in turn, characterize welfare cost and redistributive effects of inflation.
Speaker:
Shihan Shen is an Assistant Professor of Economics at Rice University. She received her Ph.D. in Economics from the University of California, Los Angeles. Her research lies in macroeconomics, with a focus on firm dynamics, including resource misallocation, firm growth, and innovation.
