Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle

Cheng Chen, Tatsuro Senga, Chang Sun and Hongyong Zhang

No 8468, CESifo Working Paper Series from CESifo

Abstract: Using a long-panel data set of Japanese firms that contains firm-level sales forecasts, we provide evidence on firm-level uncertainty and imperfect information over their life cycles. We find that firms make non-negligible and positively auto-correlated forecast errors. However, they make more precise forecasts and less auto-correlated forecast errors when they become more experienced. We then build a model of heterogeneous firms with endogenous entry and exit where firms gradually learn about their demand by using a noisy signal. We present our novel approach to cleanly isolate the learning mechanism from other mechanisms by using expectations data over time. We combine the model with our data to perform a non-parametric decomposition of forecast errors and find that learning accounts for between 20% to 40% of the overall decline in forecast errors over the life cycle. Our model shows that, within the context of our cross-regional data, productivity gains from removing information frictions ranges from 3% to 12%. We find a prominent role of firm entry and exit in generating high productivity gains.

Keywords: firm expectations; forecast errors; uncertainty; learning; productivity (search for similar items in EconPapers)
JEL-codes: D83 D84 E22 E23 F23 L20 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-bec, nep-com, nep-ent and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp8468.pdf (application/pdf)

Related works:
Journal Article: Uncertainty, imperfect information, and expectation formation over the firm’s life cycle (2023)
Working Paper: Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle (2018)
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:_8468

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 ().