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Reallocation and Learning over the Business Cycle

  • Fabiano Schivardi

    (Banca d'Italia)

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.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 345.

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Date of creation: Dec 1998
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Handle: RePEc:bdi:wptemi:td_345_98
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Web page: http://www.bancaditalia.it

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  1. Schivardi, Fabiano & Schneider, Martin, 2005. "Strategic Experimentation and Disruptive Technological Change," CEPR Discussion Papers 4925, C.E.P.R. Discussion Papers.
  2. 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.
  3. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  4. 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.
  5. 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.
  6. 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.
  7. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  8. Schivardi, Fabiano, 2003. "Reallocation and learning over the business cycle," European Economic Review, Elsevier, vol. 47(1), pages 95-111, February.
  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  10. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes and Wisdom After the Fact," Discussion Papers 1992_18, Columbia University, Department of Economics.
  11. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  12. Vives, Xavier, 1996. "Social learning and rational expectations," European Economic Review, Elsevier, vol. 40(3-5), pages 589-601, April.
  13. 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.
  14. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  15. Zeira, Joseph, 1994. "Informational Cycles," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 31-44, January.
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