Information Acquisition and Learning from Prices Over the Business Cycle

Abstract

We study firms’ incentives to acquire costly information in booms and recessions to understand the role of endogenous information in explaining business cycles. We find that when the economy has been in a boom in the previous period, and firms enter the current period with an optimistic belief, the incentive to acquire information is weaker than when the economy has been in a recession and firms share a pessimistic belief. However, the price system, by transmitting information from informed to uninformed firms, dampens information demand and moderates the cyclicality of the aggregate learning outcome. Even though learning from equilibrium prices acts to stabilize fluctuations by discouraging information acquisition, it can be welfare-enhancing to make information prohibitively costly to obtain.