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Subjective Uncertainty, Expectations, and Firm Behavior

Stefan Lautenbacher

No 349, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: Based on a new survey question in a large and representative panel of German firms, this paper introduces a novel measure of managers’ subjective uncertainty. I compare this measure of business uncertainty to respondents’ business expectations and document a strong negative relationship. However, the link is much weaker in bad times, since uncertainty is then persistently high – even when expectations are favorable. I continue by investigating the relative importance of uncertainty and expectations for corporate decisions. Exploiting information on firms’ investment and labor reactions to the COVID-19 crisis, I do not find evidence that uncertainty induced “wait and see” behavior. However, a deterioration in managers’ expectations and in their assessment of their firms’ business situation predicts investment deferral and a reduction in employment.

Keywords: Subjective uncertainty; expectations; firms; survey data; corporate decisions; business cycles (search for similar items in EconPapers)
JEL-codes: C83 D22 D84 E32 E71 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-bec, nep-eur, nep-hrm, nep-mac and nep-upt
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Working Paper: Subjective Uncertainty, Expectations, and Firm Behavior (2020) Downloads
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