Incomplete Information and Investment Inaction

Jonathan Adams, Cheng Chen (), Min Fang, Takahiro Hattori () and Eugenio Rojas
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Cheng Chen: Clemson University
Takahiro Hattori: University of Tokyo

No 1013, Working Papers from University of Florida, Department of Economics

Abstract: How do investment friction and information frictions interact? We study this question in a stylized continuous time model of heterogeneous firms facing incomplete information and irreversible investment. We analytically characterize how the information friction distorts firms' decision rules and stationary distribution. The two frictions interact in rich and substantial ways. At the firm level, noisier information shrinks a firm's inaction region and reduces the elasticity of investment to productivity. In the aggregate, it increases steady-state capital, increases capital misallocation, and attenuates the effect of productivity shocks on investment. Finally, we test and confirm these predictions using Japanese administrative data that match firms' forecasts to their balance sheets, incomes, and expenditures.

JEL-codes: D25 D84 E22 E32 (search for similar items in EconPapers)
Date: 2024-09
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Citations: View citations in EconPapers (1)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4945647 First version, 09-03-2024 (application/pdf)

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