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Does higher firm profit dispersion reflect greater micro uncertainty?

Jin Yeub Kim and Myungkyu Shim

Economics Letters, 2019, vol. 176, issue C, 35-38

Abstract: Countercyclical dispersion of firm outcomes (micro dispersion) is commonly used as a proxy for micro uncertainty. In this paper, we characterize conditions under which micro dispersion and micro uncertainty co-move positively in the context of a large Cournot economy with dispersed information and a financial market that aggregates private information. We also show that the parameter region supporting the positive co-movement shrinks when (1) public signal is endogenous through financial asset prices or (2) strategic substitutability in firms’ output decisions is weak. Our analysis raises a cautionary note on using micro dispersion as a measure of uncertainty shocks.

Keywords: Firm profit dispersion; Micro uncertainty; Cournot market; Dispersed information; Endogenous public signal; Strategic substitutability (search for similar items in EconPapers)
JEL-codes: D82 D83 E32 G12 G14 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecolet:v:176:y:2019:i:c:p:35-38