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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. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  2. 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.
  3. 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.
  4. Schivardi, Fabiano & Schneider, Martin, 2005. "Strategic Experimentation and Disruptive Technological Change," CEPR Discussion Papers 4925, C.E.P.R. Discussion Papers.
  5. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
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  7. Zeira, Joseph, 1994. "Informational Cycles," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 31-44, January.
  8. Schivardi, F., 1998. "Reallocation and Learning Over the Business Cycle," Papers 345, Banca Italia - Servizio di Studi.
  9. 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.
  10. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-85, September.
  11. 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.
  12. Guiso, L. & Schivardi, F., 2000. "Information Spillovers and Factor Adjustment," Papers 368, Banca Italia - Servizio di Studi.
  13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  14. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  15. 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.
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