Booms and Busts with dispersed information

This paper shows that dispersed information generates booms and busts in economic activity. Boom-and-bust dynamics appear when rms are initially over-optimistic about demand due to a noisy news. Consequently, they overproduce, which generates a boom. This depresses their mark-ups, which, to firms, signals low demand and overturns their expectations, generating a bust. This emphasizes a novel role for imperfect common knowledge: dispersed information makes firms ignorant about their competitors' actions, which makes them confuse high noise-driven supply with low fundamental demand. Boom-and-bust episodes are more dramatic when the aggregate noise shocks are more unlikely and when the degree of strategic substitutability in quantity-setting is stronger.