Endogenous Information Acquisition and Countercyclical Uncertainty

49 Pages Posted: 19 Sep 2016

See all articles by Jess Benhabib

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: September 17, 2016

Abstract

We introduce endogenous information acquisition in an otherwise standard business cycle model. In our framework, information is a productive input, which is essentially specialized labor, so information acquisition is linked to the labor market and thereby the macroeconomic condition. Our paper shows that when firms acquire information optimally, information acquisition is endogenously procyclical and therefore economic uncertainty faced by the firms is countercyclical. Two-way feedback exists between economic uncertainty and macroeconomic activities, resulting in an amplification effect of TFP shocks and possibly generating multiple equilibria. Our basic model can also be extended to explain countercyclical aggregate volatility. On the theoretical side, our model demonstrates that strategic complementarity (substitutability) in information acquisition coincides with strategic complementarity (substitutability) in production and that reducing uncertainty through information acquisition improves resource allocation.

Keywords: Information acquisition, Countercyclical uncertainty, Strategic complementarity and substitutability, Resource misallocation

JEL Classification: E30, E44, G01

Suggested Citation

Benhabib, Jess and Liu, Xuewen and Wang, Pengfei, Endogenous Information Acquisition and Countercyclical Uncertainty (September 17, 2016). Journal of Economic Theory, Vol. 165, 2016, Available at SSRN: https://ssrn.com/abstract=2840286

Jess Benhabib

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Xuewen Liu (Contact Author)

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics ( email )

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Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

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