Firms' Optimism and Pessimism

39 Pages Posted: 28 Apr 2013  

Rudi Bachmann

University of Michigan at Ann Arbor - Department of Economics

Steffen Elstner

German Council of Economic Experts

Date Written: April 2013

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

Bachmann, Rudi and Elstner, Steffen, Firms' Optimism and Pessimism (April 2013). NBER Working Paper No. w18989. Available at SSRN: https://ssrn.com/abstract=2257179

Rudi Bachmann (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Steffen Elstner

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

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