Working Paper: NBER ID: w28259
Authors: Nicholas Bloom; Steven J. Davis; Lucia Foster; Brian Lucking; Scott Ohlmacher; Itay Saporta-Eksten
Abstract: The Census Bureau’s 2015 Management and Organizational Practices Survey (MOPS) utilized innovative methodology to collect five-point forecast distributions over own future shipments, employment, and capital and materials expenditures for 35,000 U.S. manufacturing plants. First and second moments of these plant-level forecast distributions covary strongly with first and second moments, respectively, of historical outcomes. The first moment of the distribution provides a measure of business’ expectations for future outcomes, while the second moment provides a measure of business’ subjective uncertainty over those outcomes. This subjective uncertainty measure correlates positively with financial risk measures. Drawing on the Annual Survey of Manufactures and the Census of Manufactures for the corresponding realizations, we find that subjective expectations are highly predictive of actual outcomes and, in fact, more predictive than statistical models fit to historical data. When respondents express greater subjective uncertainty about future outcomes at their plants, their forecasts are less accurate. However, managers supply overly precise forecast distributions in that implied confidence intervals for sales growth rates are much narrower than the distribution of actual outcomes. Finally, we develop evidence that greater use of predictive computing and structured management practices at the plant and a more decentralized decision-making process (across plants in the same firm) are associated with better forecast accuracy.
Keywords: Business Expectations; Subjective Uncertainty; Forecast Accuracy; Management Practices
JEL Codes: L2; M2; O32; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subjective expectations (D84) | actual outcomes (P47) |
| higher subjective uncertainty (D80) | less accurate forecasts (C53) |
| greater use of predictive computing and structured management practices (C89) | better forecast accuracy (C53) |