No Firm is an Island? How Industry Conditions Shape Firms' Aggregate Expectations
, , ,
We study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions using a survey of French manufacturing firms. We document two novel features. First, the adjustment of firms’ expectations is more rapid after industry-specific shocks than aggregate shocks. This is consistent with rational inattention models which predict that firms should pay more attention to industry variation than aggregate conditions. Second, in response to industry shocks that have no aggregate effects, firms’ aggregate expectations respond. This is consistent with “island” models in which firms use the specific prices they observe to make inferences about broader aggregate conditions. We also study how these results vary across industries.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Document Object Identifier (DOI): 10.3386/w27317