Information Acquisition and the Finance-Uncertainty Trap

Ding Dong (), Allen Hu (), Zhaorui Li () and Zheng Liu

No 2025-12, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Using novel measures of information acquisition, we document causal evidence of a feedback loop between firms’ credit access and information acquisition. To examine the macroeconomic implications of this feedback loop, we develop a tractable general equilibrium framework with financial frictions and endogenous information acquisition. In line with the empirical evidence, the model predicts that a rise in information costs raises the level of uncertainty and reduces a firm’s equity value, hampering its credit access. On the other hand, tightened credit constraints restrain activity of high-productivity firms, leading to misallocation that reduces aggregate productivity and firm profits, and discouraging information acquisition. This feedback loop creates a finance-uncertainty trap that substantially amplifies and prolongs business cycle fluctuations.

Keywords: information acquisition; endogenous uncertainty; financial frictions; misallocation; Business Cycles (search for similar items in EconPapers)
JEL-codes: D83 E32 E44 (search for similar items in EconPapers)
Pages: 57
Date: 2025-07-05
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DOI: 10.24148/wp2025-12

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