Pricing decisions in an experimental dynamic stochastic general equilibrium economy

• The objective of the paper is to consider whether empirical stylized facts about the pricing behavior of firms appear in a laboratory economy.
• An experimental economy, with a structure based on the dynamic stochastic general equilibrium model, is created.
• The price setting behavior of firms is analyzed, with an emphasis on dynamic patterns and correlations with macroeconomic variables.
• These patterns conform to a number of empirical stylized facts in the field.
• The patterns are robust in that they appear in four different experimental treatments.

We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian dynamic stochastic general equilibrium (DSGE) model. We analyze the behavior of firms’ pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.