Working Paper: NBER ID: w12557
Authors: Laura Veldkamp; Justin Wolfers
Abstract: Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous work examined production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost of production and a low marginal cost of replication, sectors can share the cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated productions choices. By filtering out sector-specific shocks and transmitting aggregate ones, information markets amplify business-cycle comovement.
Keywords: Information Acquisition; Business Cycle Comovement; Aggregate Shocks
JEL Codes: D82; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate information (C43) | increased correlation in production decisions across sectors (D20) |
| decreasing costs of information (D83) | reduced comovement (F29) |
| shared cost of acquiring information (D83) | synchronized output decisions (C69) |
| aggregate information (C43) | output comovement exceeds comovement in productivity (O49) |
| information market (L17) | aggregate shocks to beliefs that mimic aggregate shocks to endogenous choice variables (D80) |