Business Uncertainty in Developing and Emerging Economies

Edgar Avalos, Jose Maria Barrero, Elwyn Davies, Leonardo Iacovone and Jesica Torres

No 11368, CESifo Working Paper Series from CESifo

Abstract: We study business uncertainty in high- versus low-volatility environments by surveying over 31,000 managers across 41 countries. We elicit subjective probability distributions for future own-firm sales and measure firm-level uncertainty with their mean absolute deviations. Analogously, we measure realized volatility using absolute forecast errors. We establish two new facts. (1) Subjective uncertainty and realized volatility both decline with GDP per capita. (2) Managers underestimate volatility everywhere (they are overprecise), but more so in low-volatility rich countries. We build a heterogeneous-firm dynamic model and show that our facts imply larger TFP gaps between the US and developing/emerging economies. In the model, high volatility generates investment and growth opportunities in poor countries. But high uncertainty and low overprecision slow reallocation and pull down poor-country output. Quantitatively, the volatility effect dominates, so we infer 30 to 40% lower TFP in poor countries to reconcile their high volatility and low GDP per capita.

Keywords: managers; uncertainty; volatility; aggregate TFP; real options; development accounting (search for similar items in EconPapers)
JEL-codes: D25 D84 E22 E23 G31 G32 O11 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dev and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp11368.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11368

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().