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The Effect of Disaggregate Information on the Expectation Formation of Firms

Author

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  • Lukas Buchheim
  • Sebastian Link

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Abstract

This paper studies a new aspect of firms’ expectation formation by asking whether expectations primarily reflect aggregate, industry-wide information (e.g., industry trends) or disaggregate information (e.g., firm-specific information). First, we show that disaggregate information is strongly associated with expectations even when controlling for aggregate information at high-dimensional industry levels. Moreover, aggregate and disaggregate information explain comparable shares of the variance in expectations. Second, we exploit a natural experiment to identify the causal effect of new information on expectations. The predictable demand effects for durable goods due to the German VAT increase of 2007 implied that, at the time, durable goods retailers had access to more reliable information about their future demand than non-durable goods retailers. Utilizing this observation in a difference-in-differences design, we find that “treated” firms were significantly more forward-looking ahead of the VAT-induced demand shifts. Overall, our results suggest that firms rationally incorporate disagreggate information into their expectations.

Suggested Citation

  • Lukas Buchheim & Sebastian Link, 2017. "The Effect of Disaggregate Information on the Expectation Formation of Firms," CESifo Working Paper Series 6768, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6768
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp6768.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lena Boneva & James Cloyne & Martin Weale & Tomasz Wieladek, 2019. "Firms' Price, Cost and Activity Expectations: Evidence from Micro Data," Economic Statistics Centre of Excellence (ESCoE) Discussion Papers ESCoE DP-2019-05, Economic Statistics Centre of Excellence (ESCoE).
    2. Sebastian Link, 2018. "Harmonization and Interpretation of the ifo Business Survey's Micro Data," CESifo Working Paper Series 7427, CESifo Group Munich.
    3. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot, 2019. "Monetary Policy Announcements and Expectations: Evidence from German Firms," CEPR Discussion Papers 13916, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    expectation formation; firm behavior; survey data; natural experiments in macroeconomics; heterogeneity in expectations;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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