Working Paper: CEPR ID: DP4076
Authors: Harris Dellas
Abstract: Economic decisions such as occupational and entrepreneurial choices may violate true comparative advantage when economic agents are uncertain about which activity best matches their talents. If relative performance varies over the business cycle (for instance, if downturns affect disproportionately those who are pursuing the wrong activity), then economic fluctuations may affect the probability and persistence of resource mismatches. The present work offers a novel, informational perspective to the business cycle and provides a link between aggregate fluctuations and the long-term allocation of resources.
Keywords: business cycles; comparative advantage; incomplete information; matching; stabilization
JEL Codes: D83; E32; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business cycle downturns (E32) | improved accuracy of talent allocation (J24) |
| recessions (E32) | enhanced learning process about individuals' true occupational matches (J24) |
| severe economic adversities (N16) | separating equilibrium for true type ascertainment (C62) |
| stabilization policies (E63) | informational inefficiencies (D83) |
| stabilization policies (E63) | persistent resource misallocation (Q30) |
| speed of learning (J24) | probability of misclassification (C52) |
| stabilization policies (E63) | trade-offs between transitory and permanent mismatches (F16) |