New Look at Uncertainty Shocks: Imp erfect Information and Misallocation
Abstract:
Uncertainty faced by ind ividual firms appears to be heterogeneous. In this paper, I construct new e mpirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncerta inty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model with Bay esian learning and uncertainty shocks to study the aggregate implications o f my new empirical findings. My model establishes a close link between the rise in firms’ uncertainty at the start of a recession and the slow pace of subsequent recovery. These results are obtained in an environment that emb eds Jovanovic’s (1982) model of learning in a setting where each firm gradu ally learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Firms differ in their informati on; more informed firms have lower posterior variances in beliefs. An uncer tainty shock is a rise in the probability that any given firm will lose its information. When calibrated to reproduce the level and cyclicality of my leading measure of firm-level uncertainty, the model generates a prolonged recession followed by anemic recovery in response to an uncertainty shock. When confronted with a rise in firm-level uncertainty consistent with adven t of the Great Recession, it explains 79 percent of the observed decline in GDP and 89 percent of the fall in investment.
DTSTAMP:20260406T091547Z DTSTART:20150209T153000Z DTEND:20150209T170000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR