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Abstract:
Many explanations for home or local bias rely on information asymmetry: investors know more about their home assets. A criticism of these theories is that asymmetry should disappearwhen information is tradable. This criticism is flawed. If investors have asymmetric prior beliefs, but choose how to allocate limited learning capacity before investing, they will not necessarily learn foreign information. Investors want to exploit increasing returns to specialization: The bigger the home information advantage, the more desirable are home assets; but the more home assets investors expect to own, the higher the value of additional home information. Even with a tiny home information advantage, and even when foreign information is no harder to learn, many investors will specialize in home assets, remain uninformed about foreign assets, and amplify their initial information asymmetry. The more investors can learn, the more home biased their portfolios become. The model's predictions are consistent with observed patterns of foreign investment, returns, and portfolio flows.

Abstract:
Many explanations for home or local bias rely on information asymmetry: investors know more about their home assets. A criticism of these theories is that asymmetry should disappear when information is tradable. This criticism is flawed. If investors have asymmetric prior beliefs, but choose how to allocate limited learning capacity before investing, they will not necessarily learn foreign information. Investors want to exploit increasing returns to specialization: The bigger the home information advantage, the more desirable are home assets; but the more home assets investors expect to own, the higher the value of additional home information. Even with a tiny home information advantage, and even when foreign information is no harder to learn, many investors will specialize in home assets, remain uninformed about foreign assets, and amplify their initial information asymmetry. The more investors can learn, the more home biased their portfolios become. The model's predictions are consistent with observed patterns of foreign investment, returns, and portfolio flows.

Abstract:
Many papers have argued that home bias arises because home investors can predict pays off their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small home information advantage. They can choose what information to learn before they invest in many risky assets. Surprisingly, even when home investors can learn what foreigners know, they choose not to. The reason is that investors profit more from knowing information that others do not know. Allowing investors to learn amplifies their initial information asymmetry. The model explains local and industry bias as well as observed patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.

Home bias, asymmetric information, learning

Abstract:
Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why doesn't global information access eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio out-performance and asset prices. Finally, we propose new avenues for empirical research.

Abstract:
Many papers have argued that home bias arises because home investors can predict payoffs of their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small home information advantage and can choose what information to learn before they invest in risky assets. Surprisingly, even when home investors can learn what foreigners know, they choose not to. The reason is that investors profit more from knowing information that others do not know. Allowing investors to learn amplifies their initial small home information advantage. The model is broadly consistent with local and industry bias as well as patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.

Home bias, asymmetric information, information theory, local bias

Abstract:
What makes a good leader? A good leader is able to coordinate his followers around a credible mission statement, which communicates the future course of action of the organization. In practice, leaders learn about the best course of action for the organization over time. While learning helps improve the organization's goals it also creates a time-consistency problem. Leader overconfidence is a valuable attribute in such a setting, since it slows down the leader's learning and thus improves the credibility of the mission statement. But overconfident leaders also inhibit communication with followers and leader overconfidence is costly when followers have sufficiently valuable signals.

leadership, CEO overconfidence, coordination games

Abstract:
If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information cost functions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.

Abstract:
If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information cost functions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.

Information choice, portfolio theory, learning, asymmetric information

Abstract:
The invisibility of information precludes a direct test of attention allocation theories. To surmount this obstacle, we develop a model that uses an observable variable -- the state of the business cycle -- to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins and ends with observable variables, it becomes testable. We apply our theory to a large information-based industry, actively managed equity mutual funds, and study its investment choices and returns. Consistent with the theory, which predicts cyclical changes in attention allocation, we find that in recessions, funds' portfolios (1) covary more with aggregate payoff-relevant information, (2) exhibit more cross-sectional dispersion, and (3) generate higher returns. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others.

information choice, investment management, business cycle

Abstract:
Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This model generates this high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate `excess covariance.' The cross-sectional and time-series properties of asset price covariance are consistent with this explanation.

Comovement, herding, information market, asset pricing

Abstract:
Traditional asset pricing models predict that covariance between prices of different assetsshould be lower than what we observe in the data. This model generates this high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixedcosts, competitive producers charge more for low-demand information than for high-demandinformation. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate `excess covariance.' The cross-sectional and time series properties of asset price covariance are consistent with this explanation.

Comovement, herding, information market, asset pricing

Abstract:
Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This model generates high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate `excess covariance.' The cross-sectional and time-series properties of asset price covariance are consistent with this explanation.

Abstract:
Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This paper introduces markets for information that generate high price covariance within a rational expectations framework. When information is costly, rational investors only buy information about a subset of the assets. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. The low price of high-demand information makes investors want to purchase the same information that others are purchasing. When investors price assets using a common subset of information, news about one asset affects the other assets prices; asset prices comove. The cross-sectional and time-series properties of comovement are consistent with this explanation.

Abstract:
Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This model generates high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate excess covariance. The cross-sectional and time-series properties of asset price covariance are consistent with this explanation.

Comovement, herding, information market, learning, asset pricing

Abstract:
Emerging equity markets witness occasional surges in the price level (frenzies) and increases in cross-market price dispersion (herds), accompanied by a flood of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the same information because it has the lowest price. By lowering risk, information raises the asset's price. Given two identical assets, investors herd: one price is higher because abundant information about that asset reduces its payoff risk. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices and higher cross-market price dispersion.

Abstract:
Promising emerging equity markets often witness investment herds and frenzies, accompanied by an abundance of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the most popular information because it has the lowest price. Given two identical asset markets, investors herd: asset demand is higher in the market with abundant information because information reduces risk. By lowering risk, information raises the asset's price. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria raise price volatility and create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices.

Crashes, herding, information market, media

Abstract:
Emerging equity markets witness occasional surges in the price level (frenzies) and increases in cross-market price dispersion (herds), accompanied by a flood of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the same information because it has the lowest price. By lowering risk, information raises the asset's price. Given two identical assets, investors herd: one price is higher because abundant information about that asset reduces its payoff risk. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices and higher cross-market price dispersion.

Information markets, news, herding, bubbles, frenzies

Abstract:
Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings -- observe multiple ratings and disclose only the most favorable -- before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Many blame the recent financial market turmoil on ratings agencies. We develop an equilibrium model of the market for ratings and use it to examine popular arguments about the origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings - observe multiple ratings and disclose only the most favorable - before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings despite the fact that each ratings agency discloses an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to a investor-initiated ratings system alleviates the bias, but could collapse the market for information.

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 ofproduction and a low marginal cost of replication, sectors can share the cost of acquiring aggregate information, rather than each paying the full production cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated production choices. By filtering out sector-specific shocks and transmitting aggregate ones, informationmarkets amplify business-cycle comovement.

Abstract:
When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.

Business cycles, comovement puzzle, costly information, information markets

Abstract:
When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.

business cycles, comovement puzzle, information markets

Abstract:
We explore how optimal information choices change the predictions of strategic models.When a large number of agents play a game with strategic complementarity, information choices exhibit complementarity as well: If an agent wants to do what others do, they want to know what others know. This makes heterogeneous beliefs difficult to sustain and may generate multiple equilibria. In models with substitutability, agents prefer to differentiate their information choices. We use these theoretical results to examine the role of information choice in recentprice-setting models and to propose modeling techniques that ensure equilibrium uniqueness.

Abstract:
We explore how optimal information choices change the predictions of strategic models. When a large number of agents play a game with strategic complementarity, information choices exhibit complementarity as well: If an agent wants to do what others do, they want to know what others know. This makes heterogeneous beliefs difficult to sustain and may generate multiple equilibria. In models with substitutability, agents prefer to differentiate their information choices. We use these theoretical results to examine the role of information choice in recent price-setting models and to propose modeling techniques that ensure equilibrium uniqueness.

Coordination games, information choice, beauty contest game, price-setting

Abstract:
The idea that information frictions amplify business cycles is hard to evaluate because information is not easily measured. We propose a quantifiable information friction that amplifies output fluctuations. In our simple model of decentralized trade, income dispersion measures uncertainty about buyer characteristics. Counter-cyclical income dispersion makes the asymmetric information friction stronger in recessions. Using income dispersion estimates to quantify the model's effect, we find that this simple friction more than doubles output persistence and increases output volatility 9-fold. The paper compares the model to aggregate data, tests its mechanism using state-level income dispersion, and examines its indirect predictions for markups and luxury goods.

business cycles, counter-cyclical markups, asymmetric information

Abstract:
We solve the problem of an investor who chooses which assets' payoff to acquireinformation about before making an investment decision. Investors specialize becauseinformation has increasing returns: As an investor learns more about an asset, itbecomes less risky and more desirable to hold; as he holds more of the asset, the value of information about it increases. Investors hold some fraction of their assets in a well diversified fund, about which they learn nothing, and hold the other fraction in a small set of highly-correlated assets that they specialize in learning about. In equilibrium, ex-ante identical investors acquire different information. Information is a strategic substitute because assets that many investors learn about have low expected returns. The theory can explain the empirical evidence that individual investors hold part of their equity portfolio in diversified mutual funds and the rest in a small number of highly-correlated assets. While such portfolios may appear under-diversified, they are optimal for investors who face constraints on how much information they can acquire.

Abstract:
Much of the increase in female labor force participation in the post-war period has come from the entry of married women with young children. Accompanying this change has been a rise in cultural acceptance of maternal employment. We argue that the concurrent S-shaped rise in maternal participation and its cultural acceptance is well explained by generations of women engaged in Bayesian learning about the effects of maternal employment on children. Each generation updates their parents' beliefs by observing the children of employed women. When few women participate in the labor force, most observations are uninformative and participation rises slowly. As information accumulates and the effects of labor force participation become less uncertain, more women participate, learning accelerates and labor force participation rises faster. As beliefs converge to the truth, participation flattens out. Survey data, wage data and participation data support our mechanism and distinguish it from alternative explanations.

female labor force participation, preference formation, S-shaped learning, labor supply, endogenous information diffusion

Abstract:
Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why doesn't global information access eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio out-performance and asset prices. Finally, we propose new avenues for empirical research.

Home bias, asymmetric information, learning

Abstract:
What makes a good leader? A good leader is able to coordinate his followers around a credible mission statement, which communicates the future course of action of the organization. In practice, leaders learn about the best course of action for the organization over time. While learning helps improve the organization's goals it also creates a time-consistency problem. Leader resoluteness is a valuable attribute in such a setting, since it slows down the leader's learning and thus improves the credibility of the mission statement. But resolute leaders also inhibit communication with followers and leader resoluteness is costly when followers have sufficiently valuable signals.

Abstract:
When an economic boom ends, the downturn is generally sharp and short. When growth resumes, the boom is more gradual. Our explanation for this pattern rests on learning about productivity. When agents believe productivity is high, they work, invest, and produce more. More production generates higher precision information. When the economy passes the peak of a productivity boom, precise estimates of the slowdown prompt quick, decisive reactions: Investment and labor fall sharply. At the end of a slump, low production yields noisy estimates of the recovery. The noise impedes learning, slows the recovery, and makes booms more gradual than crashes. A calibrated model generates asymmetry in growth rates similar to macroeconomic aggregates. Fluctuations in agentsâ¬" forecast precision match observed countercyclical dispersion in analystsâ¬" macroeconomic forecasts.â¬SThere is, however, another characteristic of what we call the trade cycle that our explanation must cover; namely, the phenomenon of the crisis - the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently, whereas there is, as a rule, no such sharp turning point when an upward is substituted for a downward tendency.â¬? J.M. Keynes (1936)

Abstract:
When a boom ends, the downturn is generally sharp and short. When growth resumes, theboom is more gradual. Our explanation rests on learning about productivity. When agentsbelieve productivity is high, they work, invest, and produce more. More production generates higher precision information. When the boom ends, precise estimates of the slowdown prompt decisive reactions: Investment and labor fall sharply. When growth resumes, low production yields noisy estimates of recovery. Noise impedes learning, slows recovery, and makes boomsmore gradual than downturns. A calibrated model generates growth rate asymmetry similar to macroeconomic aggregates. Fluctuations in agents' forecast precision match observed counter cyclical errors of forecasters.

Abstract:
If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information costfunctions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.

Abstract:
The invisibility of information precludes a direct test of attentionallocation theories. To surmount this obstacle, we develop a model thatuses an observable variable { the state of the business cycle { topredict attention allocation. Attention allocation, in turn, predictsaggregate investment patterns. Because the theory begins and ends withobservable variables, it becomes testable. We apply our theory to alarge information- based industry, actively managed equity mutual funds,and study its investment choices and returns. Consistent with thetheory, which predicts cyclical changes in attention allocation, we¯nd that in recessions, funds' portfolios (1) covary more withaggregate payo®-relevant information, (2) exhibit morecross-sectional dispersion, and (3) gener- ate higher returns. Theresults suggest that some, but not all, fund managers processinformation in a value-maximizing way for their clients and that theseskilled managers outperform others.

Abstract:
The invisibility of information precludes a direct test of attention allocation theories. To surmount this obstacle, we develop a model that uses an observable variable -- the state of the business cycle -- to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins and ends with observable variables, it becomes testable. We apply our theory to a large information-based industry, actively managed equity mutual funds, and study its investment choices and returns. Consistent with the theory, which predicts cyclical changes in attention allocation, we find that in recessions, funds' portfolios (1) covary more with aggregate payoff-relevant information, (2) exhibit more cross-sectional dispersion, and (3) generate higher returns. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We construct a model of counter-cyclical markups based on cyclical variation inthe dispersion of income across agents. The model is neoclassical in most respects, with monopolistically competitive firms facing a distribution of buyers that changes through time. Income dispersion is high during recessions, which reduces the price elasticity of demand and increases markups applied by firms. Using recent estimates ofcounter-cyclical income dispersion, we calibrate the model and show that it generates realistic markups as well as other salient features of business cycles.

business cycles, counter-cyclical markups, income dispersion

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.

Abstract:
We develop a rational model of investors who choose which asset payo®s to acquire informa-tion about, before forming portfolios. Scale economies in information acquisition lead investors to specialize in learning about a set of highly-correlated assets. Knowing more about these assets makes them less risky and more desirable to hold. Bene¯ts to specialization compete with bene¯ts to diversi¯cation. The resulting asset portfolios appear under-diversi¯ed from theperspective of standard theory, but are optimal. In equilibrium, information is a strategic substitute because assets that many investors learn about have low expected returns. Increasing returns, combined with strategic substitutability leads ex-ante identical investors to specialize in di®erent information, and hold different portfolios. Information choice rationalizes investingin a diversified fund and a set of highly-correlated assets, an allocation observed in the data but usually deemed anomalous.

Abstract:
When an economic boom ends, the downturn is generally sharp and short. When growthresumes, the boom is more gradual. Our explanation for this pattern rests on learning about productivity. When agents believe productivity is high, they work, invest, and produce more. More production generates higher precision information. When the economy passes the peak of a productivity boom, precise estimates of the slowdown prompt quick, decisive reactions: Investment and labor fall sharply. At the end of a slump, low production yields noisy estimatesof the recovery. The noise impedes learning, slows the recovery, and makes booms more gradual than crashes. A calibrated model generates asymmetry in growth rates similar to macroeconomic aggregates. Fluctuations in agentsâ¬" forecast precision match observed countercyclical dispersion in analystsâ¬" macroeconomic forecasts.â¬SThere is, however, another characteristic of what we call the trade cycle that ourexplanation must cover; namely, the phenomenon of the crisis the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently , whereas there is, as a rule, no such sharp turning point when an upward is substituted for a downward tendency.â¬? J.M. Keynes (1936).

learning, asymmetry, business cycles, uncertainty

Abstract:
Much of the increase in female labor force participation in the post-war period has comefrom the entry of married women with young children. Accompanying this change has been arise in cultural acceptance of maternal employment. We argue that the concurrent S-shaped rise in maternal participation and its cultural acceptance is well explained by generations of women engaged in Bayesian learning about the e®ects of maternal employment on children. Each generation updates their parents' beliefs by observing the children of employed women. When few women participate in the labor force, most observations are uninformative and participation rises slowly. As information accumulates and the e®ects of labor force participation become less uncertain, more women participate, learning accelerates and labor force participation rises faster. As beliefs converge to the truth, participation °attens out. Survey data, wage data andparticipation data support our mechanism and distinguish it from alternative explanations.

Abstract:
One of the most dramatic economic transformations of the past century has been the entry of women into the labor force. While many theories explain why this change took place, we investigate the process of transition itself. We argue that local information transmission generates changes in participation that are geographically heterogeneous, locally correlated and smooth in the aggregate, just like those observed in our data. In our model, women learn about the effects of maternal employment on children by observing nearby employed women. When few women participate in the labor force, data is scarce and participation rises slowly. As information accumulates in some regions, the effects of maternal employment become less uncertain, and more women in that region participate. Learning accelerates, labor force participation rises faster, and regional participation rates diverge. Eventually, information diffuses throughout the economy, beliefs converge to the truth, participation flattens out and regions become more similar again. To investigate the empirical relevance of our theory, we use a new county-level data set to compare our calibrated model to the time-series and geographic patterns of participation.

Abstract:
Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.

Abstract:
We explore how optimal information choices change the predictions of strategic models. When a large number of agents play a game with strategic complementarity, information choices exhibit complementarity as well: if an agent wants to do what others do, they want to know what others know. This makes heterogeneous beliefs difficult to sustain and may generate multiple equilibria. In models with substitutability, agents prefer to differentiate their information choices. We use these theoretical results to examine the role of information choice in recent price-setting models and to propose modelling techniques that ensure equilibrium uniqueness.

Abstract:
We explore how optimal information choices change the predictions of strategic models. When a large number of agents play a game with strategic complementarity, information choices exhibit complementarity as well: If an agent wants to do what others do, they want to know what others know. This makes heterogeneous beliefs difficult to sustain and may generate multiple equilibria. In models with substitutability, agents prefer to differentiate their information choices. We use these theoretical results to determine the role of information choice in recent price-setting models and to propose modeling techniques that ensure equilibrium uniqueness.

Costly Information Acquisition, Price-setting, Strategic Complementarities

Abstract:
Much of the increase in female labour force participation in the post-war period has come from the entry of married women with young children. Accompanying this change has been a rise in cultural acceptance of maternal employment. We argue that the concurrent S shaped rise in maternal participation and its cultural acceptance comes from generations of women engaged in Bayesian learning about the effects of maternal employment on children. Each generation updates their parents' beliefs by observing the children of employed women. When few women participate in the labour force, most observations are uninformative and participation rises slowly. As information accumulates and the effects of labour force participation become less uncertain, more women participate, learning accelerates and labour force participation rises faster. As beliefs converge to the truth, participation flattens out. Survey data, wage data and participation data support our mechanism and distinguish it from alternative explanations.

female labour force participation, information diffusion, labor supply, preference transmission, S-shaped learning