Endogenous information acquisition and countercyclical uncertainty

Jess Benhabib, Xuewen Liu, Pengfei Wang

    Research output: Contribution to journalArticle

    Abstract

    We introduce endogenous information acquisition into an otherwise standard business cycle model. In our framework information is a productive input, which is essentially specialized labor, so information acquisition is linked to the labor market and thereby to macroeconomic conditions. We show that when firms acquire information optimally, information acquisition is endogenously procyclical, and therefore economic uncertainty faced by the firms is countercyclical. Two-way feedback exists between economic uncertainty and macroeconomic activities, resulting in an amplification effect of TFP shocks, and possibly generating multiple equilibria. Our basic model can also be extended to explain countercyclical aggregate volatility. On the theoretical side, our model demonstrates that strategic complementarity (substitutability) in information acquisition coincides with strategic complementarity (substitutability) in production, and that reducing uncertainty through information acquisition improves resource allocation.

    Original languageEnglish (US)
    Pages (from-to)601-642
    Number of pages42
    JournalJournal of Economic Theory
    Volume165
    DOIs
    StatePublished - Sep 1 2016

    Keywords

    • Countercyclical uncertainty
    • Information acquisition
    • Resource misallocation

    ASJC Scopus subject areas

    • Economics and Econometrics

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