Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 740: Information Acquisition and Learning from Prices Over the Business Cycle

Taneli Mäkinen () and Björn Ohl ()
Additional contact information
Taneli Mäkinen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Björn Ohl: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a boom in the previous period, and firms enter the current period with an optimistic belief, the incentive to acquire information is weaker than when the economy has been in a recession and firms share a pessimistic belief. However, the price system, by transmitting information from informed to uninformed firms, dampens information demand and moderates the cyclicality of the aggregate learning outcome. Even though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain.

Keywords: information acquisition; rational expectations equilibrium; asymmetric information; strategic substitutability

JEL-codes: D51; D83; E32

33 pages, First version: February 13, 2012. Revised: March 19, 2013. Earlier revisions: November 11, 2012, November 11, 2012, March 19, 2013.

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