Abstract
This paper shows that consumers’ beliefs about firms’ production costs are an important determinant of cost pass-through. Adding imperfect information about costs to a canonical model of consumer search, changes in costs that consumers are aware of get passed through more completely than those they are unaware of. This model provides a first unified explanation of incomplete pass-through, over-shifting, and pass-through asymmetry. I test a novel prediction of this model using US mortgage data. I find that different components of the marginal cost of mortgage lending have different average pass-through rates. Widely known costs are passed through nearly completely while more obscure costs have much lower pass-through rates. This pattern is consistent with my model but cannot be explained by existing theory.