Does Competition Reduce Forecasting Bias?

27 Pages Posted: 20 May 2001

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Date Written: April 25, 2001

Abstract

Psychologists and behavioral economists have documented numerous deviations from the rational expectations model of forecasting that is a common assumption of neoclassical economics. In response, it has been claimed that, while such biases may exist for individuals, firms that exhibit (costly) biases will be eradicated through competitive pressures. In this paper, I test this hypothesis directly, by examining the effects of competition on the biases of firms' sales forecasts. Using data from firm-level surveys in five African countries, I show that firms that are protected from foreign competition generate 'backward-looking' forecasts of sales growth. There is no such deviation from rational expectations among firms in markets with foreign competitors. I further provide evidence that these erroneous forecasts have real effects on these firms' inventory management.

Keywords: Forecasting, Rational Expectations, Market Structure, Foreign Competition

JEL Classification: D21, D84

Suggested Citation

Fisman, Raymond, Does Competition Reduce Forecasting Bias? (April 25, 2001). Available at SSRN: https://ssrn.com/abstract=268008 or http://dx.doi.org/10.2139/ssrn.268008

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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