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Subjective Uncertainty, Expectations, and Firm Behavior

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  • Lautenbacher, Stefan

Abstract

Based on a large and representative panel of German firms, this paper relates a novel measure of subjective uncertainty to business expectations and firm decisions. Uncertainty is measured by asking managers directly how uncertain they are about their future business development. I show that the relationship between perceived uncertainty and expectations is strongly negative at the micro level and almost perfectly inverse in the aggregate. It is also state-dependent: uncertainty co-moves less with expectations in bad times. In a case study at the onset of the COVID-19 recession, I exploit the between-firm variation in firms' uncertainty and expectations to examine the implications of the ``real options'' theory. I find that changes in uncertainty during the aggregate downturn do not predict ``wait and see'' behavior. By contrast, first moment changes are related to investments deferral and a reduction of the workforce.

Suggested Citation

  • Lautenbacher, Stefan, 2020. "Subjective Uncertainty, Expectations, and Firm Behavior," MPRA Paper 103516, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:103516
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    More about this item

    Keywords

    subjective uncertainty; expectations; firms; corporate decisions; survey data; business cycles;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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