IDEAS home Printed from https://ideas.repec.org/p/red/sed013/623.html
   My bibliography  Save this paper

Firms' Optimism and Pessimism

Author

Listed:
  • Steffen Elstner

    (Ifo Institute for Economic Research)

  • Ruediger Bachmann

    (RWTH Aachen University)

Abstract

Are firms' expectations biased? Does it matter? We use micro data on firms' production expectations from the German IFO Business Climate Survey and compare them to realization data from the same survey. We then construct series of quantitative firm-specific expectation errors. We find that depending on the exact definition at least 6 percent and at most 35 percent of firms consistently over- or underpredict their one-quarter-ahead upcoming production. In a simple frictionless neoclassical heterogeneous firm model these expectational biases lead to factor misallocations that cause welfare losses that in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller.

Suggested Citation

  • Steffen Elstner & Ruediger Bachmann, 2013. "Firms' Optimism and Pessimism," 2013 Meeting Papers 623, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:623
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2013/paper_623.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Silvia Lui & James Mitchell & Martin Weale, 2011. "Qualitative business surveys: signal or noise?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 174(2), pages 327-348, April.
    2. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    3. Nicola Gennaioli & Yueran Ma & Andrei Shleifer, 2016. "Expectations and Investment," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 379-431.
    4. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 14, pages 715-776, Elsevier.
    5. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    6. Silvia Lui & James Mitchell & Martin Weale, 2011. "Qualitative business surveys: signal or noise?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 174(2), pages 327-348, April.
    7. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
    8. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1547-1584.
    9. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    10. Christian Mueller & Eva M. Koeberl, 2007. "The Speed of Adjustment to Demand Shocks: A Markov-chain Measurement Using Micro Panel Data," KOF Working papers 07-170, KOF Swiss Economic Institute, ETH Zurich.
    11. Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
    12. Nir Jaimovich & Sergio Rebelo, 2007. "Behavioral Theories of the Business Cycle," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 361-368, 04-05.
    13. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    14. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
    15. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
    16. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    17. Sascha O. Becker & Klaus Wohlrabe, 2008. "European Data Watch: Micro Data at the Ifo Institute for Economic Research – The “Ifo Business Survey”, Usage and Access," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 128(2), pages 307-319.
    18. Frank de Leeuw & Michael J. McKelvey, 1981. "Price Expectations of Business Firms," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 299-314.
    19. Nerlove, Marc, 1983. "Expectations, Plans, and Realizations in Theory and Practice," Econometrica, Econometric Society, vol. 51(5), pages 1251-1279, September.
    20. Müller, Hans Christian, 2011. "Forecast Errors in Undisclosed Management Sales Forecasts: The Disappearance of the Overoptimism Bias," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48683, Verein für Socialpolitik / German Economic Association.
    21. Brown, Philip & Clarke, Alex & How, Janice C. Y. & Lim, Kadir, 2000. "The accuracy of management dividend forecasts in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 309-331, July.
    22. Bachmann, Rüdiger & Bayer, Christian, 2013. "‘Wait-and-See’ business cycles?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 704-719.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2019. "Time-varying business volatility and the price setting of firms," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 82-99.
    2. Bachmann, Rüdiger & Zorn, Peter, 2020. "What drives aggregate investment? Evidence from German survey data," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    3. Bachmann, Rüdiger & Elstner, Steffen & Hristov, Atanas, 2017. "Surprise, surprise – Measuring firm-level investment innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 107-148.
    4. Altig, David & Barrero, Jose Maria & Bloom, Nicholas & Davis, Steven J. & Meyer, Brent & Parker, Nicholas, 2022. "Surveying business uncertainty," Journal of Econometrics, Elsevier, vol. 231(1), pages 282-303.
    5. Danso, Albert & Lartey, Theophilus & Amankwah-Amoah, Joseph & Adomako, Samuel & Lu, Qinye & Uddin, Moshfique, 2019. "Market sentiment and firm investment decision-making," International Review of Financial Analysis, Elsevier, vol. 66(C).
    6. Barrero, Jose Maria, 2022. "The micro and macro of managerial beliefs," Journal of Financial Economics, Elsevier, vol. 143(2), pages 640-667.
    7. Lautenbacher, Stefan, 2020. "Subjective Uncertainty, Expectations, and Firm Behavior," MPRA Paper 103516, University Library of Munich, Germany.
    8. Alexandros Botsis & Christoph Görtz & Plutarchos Sakellaris, 2020. "Quantifying Qualitative Survey Data: New Insights on the (Ir)Rationality of Firms' Forecasts," CESifo Working Paper Series 8148, CESifo.
    9. Bachmann, Rüdiger, 2019. "Comments on “Monetary policy announcements and expectations: Evidence from German firms”," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 64-68.
    10. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    11. Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE), revised Dec 2017.
    12. Angus Moore, 2017. "Measuring Economic Uncertainty and Its Effects," The Economic Record, The Economic Society of Australia, vol. 93(303), pages 550-575, December.
    13. Steffen R. Henzel & Malte Rengel, 2017. "Dimensions Of Macroeconomic Uncertainty: A Common Factor Analysis," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 843-877, April.
    14. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    15. Klepsch, Catharina & Elsas, Ralf, 2016. "How and when do firms adjust their investments toward targets?," VfS Annual Conference 2016 (Augsburg): Demographic Change 145486, Verein für Socialpolitik / German Economic Association.
    16. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
    17. Massenot, Baptiste & Pettinicchi, Yuri, 2018. "Can firms see into the future? Survey evidence from Germany," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 66-79.
    18. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot J., 2019. "Monetary policy announcements and expectations: Evidence from german firms," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 45-63.
    19. Sarah Brown & Mark N. Harris & Christopher Spencer & Karl Taylor, 2024. "Financial Expectations and Household Consumption: Does Middle‐Inflation Matter?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 741-768, June.
    20. Lui, Silvia & Mitchell, James & Weale, Martin, 2011. "The utility of expectational data: Firm-level evidence using matched qualitative-quantitative UK surveys," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1128-1146, October.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed013:623. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.