Dispersed Information and the Origins of Aggregate Fluctuations

41 Pages Posted: 25 Jul 2016

See all articles by Jakob Grazzini

Jakob Grazzini

Catholic University of the Sacred Heart of Milan

Domenico Massaro

Catholic University of Milan; University of Amsterdam - CeNDEF

Date Written: June 22, 2016

Abstract

In the presence of dispersed information, agents may decide to take into account the actions of other agents because of the possible additional information conveyed by these actions. We call the act of using other agents’ actions in the individual decision process social learning. This paper argues that social learning aimed at increasing the precision of individual information may lead to aggregate fluctuations. We consider a setting where firms receive independent noisy signals about a common fundamental and can observe other firms’ actions through a network of informational links. We show that, when firms can observe each other’s decisions, they are able to increase the accuracy of their actions. While reducing volatility at the individual level, social learning may lead to an increase in volatility at the aggregate level depending on the network topology. Moreover, if the network is very asymmetric, aggregate volatility does not decay as predicted by the law of large numbers.

Keywords: business cycle, social networks, dispersed information, aggregate volatility

JEL Classification: D830, D850, E320

Suggested Citation

Grazzini, Jakob and Massaro, Domenico, Dispersed Information and the Origins of Aggregate Fluctuations (June 22, 2016). CESifo Working Paper Series No. 5957, Available at SSRN: https://ssrn.com/abstract=2813992

Jakob Grazzini (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Milan, Milan
Italy

Domenico Massaro

Catholic University of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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