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Endogenous information acquisition and countercyclical uncertainty

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  • Benhabib, Jess
  • Liu, Xuewen
  • Wang, Pengfei

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.

Suggested Citation

  • Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Endogenous information acquisition and countercyclical uncertainty," Journal of Economic Theory, Elsevier, vol. 165(C), pages 601-642.
  • Handle: RePEc:eee:jetheo:v:165:y:2016:i:c:p:601-642
    DOI: 10.1016/j.jet.2016.07.007
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    References listed on IDEAS

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    Cited by:

    1. Nicholas Kozeniauskas & Anna Orlik & Laura Veldkamp, 2016. "The Common Origin of Uncertainty Shocks," NBER Working Papers 22384, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Information acquisition; Countercyclical uncertainty; Resource misallocation;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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