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Firms' Optimism and Pessimism

Author

Listed:
  • Ruediger Bachmann
  • Steffen Elstner
Abstract
Are firms’ expectations systematically too optimistic or too pessimistic? Does it matter? We use micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors. We find that depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller.

Suggested Citation

  • Ruediger Bachmann & Steffen Elstner, 2013. "Firms' Optimism and Pessimism," CESifo Working Paper Series 4176, CESifo.
    • Handle: RePEc:ces:ceswps:_4176
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    References listed on IDEAS

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    More about this item

    Keywords

    survey data; expectation errors; expectation biases; optimism; pessimism; firm data; heterogeneous firms;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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