Rational Inattention and Heterogeneous Firm Information
Paper Session
Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Laura Veldkamp, Columbia University
Firm Heterogeneity and Expectations
Abstract
We document a systematic decrease in firm uncertainty across across time, and show that the decrease is accounted for by an increase in the firm size distribution. Exist- ing models of firm heterogeneity do not account for these observations. We develop a rational theory of information choice, which is consistent with this evidence. In particu- lar, we show that firms’ size-dependent incentives to use “data-driven decision-making” can rationalize the size-uncertainty relationship. We illustrate the macroeconomic con- sequences of this relationship in a standard heterogenous firm model. Although larger firms have larger markups, we show that the welfare consequences are compensated for by the decrease in input misallocation. As such, we estimate that growth in firm size has contributed positively to welfare.Are Uncertain Firms Riskier?
Abstract
We use novel data on firm-level attention to characterize firms’ exposures to uncertainty. Our data captures a daily cross-section of firm-employee reading across thousands of topics. We use natural language processing tools to assess the types of topics firms are reading and show that firms that allocate relatively more attention to uncertainty versus other business-related news have nearly 15% higher CAPM betas. Consistent with their higher discount rates, these uncertain firms have relatively lower investment rates: higher attention to uncertainty relates to more than 10% lower investment and 6% lower hiring on an annual basis.Economic Growth through Diversity in Beliefs
Abstract
We study a macro-finance model with entrepreneurs who have diverse views about the likelihood that their ideas will lead to successful innovations. These views and the resulting experimentation stimulate economic growth and overcome market failures that would otherwise occur in an equilibrium without this diversity. The resulting benefits for future generations come at the cost of higher wealth and consumption inequality because a few entrepreneurs will ex-post be successful while most entrepreneurs will fail. Hence, our model provides a potential explanation for the “entrepreneurial puzzle” in which entrepreneurs choose to innovate despite taking on substantial idiosyncratic risk accompanied by low expected returns. Venture capital funds and taxes enhance risk sharing among entrepreneurs, stimulating innovation and growth unless high taxes deplete entrepreneurial capital. Redistribution via taxes reduces inequality and can raise interest rates. Nevertheless, a tradeoff exists between risk-sharing and the exertion of costly effort, giving rise to a hump-shaped economic growth curve when plotted against tax rates.JEL Classifications
- C1 - Econometric and Statistical Methods and Methodology: General