Reallocation and Learning over the Business Cycle

Fabiano Schivardi

No 345, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: I show how cyclical aggregate shocks can stimulate structural reallocation activities, which in turn amplify the effect of the shock. I emphasize the informational aspects related to restructuring activities and their potential interplay with aggregate shocks. Building on work by Caplin and Leahy (1994), I develop a model in which production units are uncertain about the value of staying in the market and learn about it over time in a Bayesian fashion. In addition to their own private assessment, they can also learn from observing other units’ decisions. Given that adjusting is costly, each unit has an incentive to delay action and wait for other players to act in order to make a better informed decision. If delay is more costly in a downturn, a negative aggregate shock can break the inertia and induce the most pessimistic agents to exit. The information released by such actions will induce more action, thus generating a burst in restructuring activities that reinforces the initial effect of the aggregate shock. This process of information accumulation and revelation offers both a powerful amplification mechanism of relatively modest aggregate shocks and a potential explanation of why restructuring tends to be concentrated in recessions.

Keywords: business cycle; business organization learning (search for similar items in EconPapers)
JEL-codes: D21 D92 (search for similar items in EconPapers)
Date: 1998-12
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Reallocation and learning over the business cycle (2003)
Working Paper: Reallocation and Learning Over the Business Cycle (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_345_98

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