Research Discussion Papers, Bank of Finland
No 7/2014:
Information acquisition and learning from prices over the business cycle
Taneli Mäkinen ()
and Björn Ohl ()
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
recession in the previous period, and firms enter the current period with a
pessimistic belief, the incentive to acquire information is stronger than
when the economy has been in a boom and firms share an optimistic belief.
The cyclicality of the aggregate learning outcome is moderated by the price
system, which transmits information from informed to uninformed firms, thus
dampening information demand. 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; (follow links to similar papers)
JEL-Codes: D51; D83; E32; (follow links to similar papers)
38 pages, February 4, 2014
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