Subjective Uncertainty, Expectations, and Firm Behavior

Stefan Lautenbacher ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: subjective uncertainty; expectations; firms; corporate decisions; survey data; business cycles (search for similar items in EconPapers)
JEL-codes: C83 D22 D84 E32 (search for similar items in EconPapers)
Date: 2020-10-13
New Economics Papers: this item is included in nep-bec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Subjective Uncertainty, Expectations, and Firm Behavior (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:103516

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