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Heterogeneous Firm Expectations and Misallocation

Author

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  • Gautier, Erwan
  • Hubert, Paul
  • Martin-Baillon, Alaïs

Abstract

This paper examines how heterogeneity in firms’ forecasting accuracy contributes to resource misallocation. Using French quarterly survey data on firm expectations matched with administrative data, we show that firms make forecast errors that significantly affect investment and hiring decisions. These decisions, in turn, lead to differences in marginal revenue product of capital (MRPK) and labor (MRPL). Heterogeneity in forecasting accuracy thus generates dispersion in MRPK and MRPL. We show that when firms underpredict their demand, their MRPK increases by 5.4% and MRPL by 4.1% compared to when they forecast their demand accurately. These effects are persistent over time and do not only reflect the existence of idiosyncratic shocks.

Suggested Citation

  • Gautier, Erwan & Hubert, Paul & Martin-Baillon, Alaïs, 2025. "Heterogeneous Firm Expectations and Misallocation," CEPR Discussion Papers 20944, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20944
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    File URL: https://cepr.org/publications/DP20944
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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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