Reallocation and Learning over the Business Cycle
I show how cyclical aggregate shocks can stimulate structural reallocation activities, which in turn amplify the effect of the shock. I emphasize the informational aspects related to restructuring activities and their potential interplay with aggregate shocks. Building on work by Caplin and Leahy (1994), I develop a model in which production units are uncertain about the value of staying in the market and learn about it over time in a Bayesian fashion. In addition to their own private assessment, they can also learn from observing other units’ decisions. Given that adjusting is costly, each unit has an incentive to delay action and wait for other players to act in order to make a better informed decision. If delay is more costly in a downturn, a negative aggregate shock can break the inertia and induce the most pessimistic agents to exit. The information released by such actions will induce more action, thus generating a burst in restructuring activities that reinforces the initial effect of the aggregate shock. This process of information accumulation and revelation offers both a powerful amplification mechanism of relatively modest aggregate shocks and a potential explanation of why restructuring tends to be concentrated in recessions.
|Date of creation:||Dec 1998|
|Date of revision:|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
- Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
- Luigi Guiso & Fabiano Schivardi, 2000.
"Information Spillovers and Factor Adjustment,"
Temi di discussione (Economic working papers)
368, Bank of Italy, Economic Research and International Relations Area.
- Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July.
- Joseph Zeira, 1994. "Informational Cycles," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 31-44.
- Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-85, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- Fabiano Schivardi, 1998.
"Reallocation and Learning over the Business Cycle,"
Temi di discussione (Economic working papers)
345, Bank of Italy, Economic Research and International Relations Area.
- Vives, X..A., 1995.
"Social Learning and Rational Expectations,"
UFAE and IAE Working Papers
305.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Fabiano Schivardi & Martin Schneider, 2008.
"Strategic Experimentation and Disruptive Technological Change,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 386-412, April.
- Schivardi, Fabiano & Schneider, Martin, 2005. "Strategic Experimentation and Disruptive Technological Change," CEPR Discussion Papers 4925, C.E.P.R. Discussion Papers.
- Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
- John Haltiwanger & Steven J. Davis, 1999.
"On the Driving Forces behind Cyclical Movements in Employment and Job Reallocation,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1234-1258, December.
- Steven J. Davis & John Haltiwanger, 1996. "On the Driving Forces Behind Cyclical Movement, in Employment and Job Reallocation," NBER Working Papers 5775, National Bureau of Economic Research, Inc.
- Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010.
"A theory of Fads, Fashion, Custom and cultural change as informational Cascades,"
Levine's Working Paper Archive
1193, David K. Levine.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Caplin, A. & Leahy, J., 1992.
"Business as Usual, Market Crashes, and Wisdom after the Fact,"
Harvard Institute of Economic Research Working Papers
1594, Harvard - Institute of Economic Research.
- Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-65, June.
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_345_98. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.