Inflation Expectations: Firm-Level Experiments

• Applicant: Professorin Ester Faia, Ph.D.
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 501537268

Firms’ inflation expectations are crucial for understanding the dynamics of inflation, particularly in situation like the post-pandemic economies in which large shocks act as trigger of inflation spirals. Firms set prices, compete in markets and choose inputs that determine their marginal costs. Their inflation expectations enter and affect all of those decisions. We aim at a causal inference of firms’ inflation expectations through a survey experiment. Specifically, we wish to test three possible channels that may affect firms’ inflation expectations. The first is the cost channel. This includes the cost of labour, which is likely to raise in the post-pandemic scenario also due to reduced labour supply, and the ensuing raise in unions' power. On reverse instead automation may help firms reduce the cost of labour, hence tame inflation. The second is linked to the role of competitors, as firms have more flexibility in raising prices in less competitive environments. In turn firms themselves form their inflation expectations based on what their expectations of competitors' pricing strategies. The third is the role of consumers’ demand: firms setting prices, do so by taking demand elasticity as given. Most often they refrain from raising prices when they fear consumers’ antagonism.The survey experiment will be composed of four modules. In the first we will ask questions to see which of the four channels is more prevalent for firms’ expectation formation. In the other three modules we focus specifically on each of the channels. Each module has similar structures: firms’ priors about relevant variables are solicited, information is provided to them randomly (in the form of unions’ requests, competitors’ expectations or consumers’ expectations), following the randomized controlled trial firms’ posterior expectations are solicited.

• DFG Programme: Research Grants
• International Connection: USA
• Cooperation Partners: Professor Dr. Francesco D' Acunto; Professor Michael Weber, Ph.D.