Does Higher Firm Profit Dispersion Reflect Greater Micro Uncertainty?

10 Pages Posted: 19 Aug 2018 Last revised: 9 Jan 2019

See all articles by Jin Yeub Kim

Jin Yeub Kim

Yonsei University - School of Economics

Myungkyu Shim

Yonsei University - School of Economics

Date Written: October 20, 2018

Abstract

Countercyclical dispersion of firm outcomes (micro dispersion) is commonly used as a proxy for micro uncertainty. In this paper, we characterize conditions under which micro dispersion and micro uncertainty co-move positively in the context of a large Cournot economy with dispersed information and a financial market that aggregates private information. We also show that the parameter region that supports the positive co-movement shrinks when (1) public signal is endogenous through financial asset prices or (2) strategic substitutability in firms' output decisions is weak. Our analysis raises a cautionary note on using micro dispersion as a measure of uncertainty shocks.

Keywords: Firm Profit Dispersion, Micro Uncertainty, Cournot Market, Dispersed Information, Endogenous Public Signal, Strategic Substitutability

JEL Classification: D82, D83, E32, G12, G14

Suggested Citation

Kim, Jin Yeub and Shim, Myungkyu, Does Higher Firm Profit Dispersion Reflect Greater Micro Uncertainty? (October 20, 2018). Economics Letters 176C (2019) pp. 35-38, Available at SSRN: https://ssrn.com/abstract=3227012 or http://dx.doi.org/10.2139/ssrn.3227012

Jin Yeub Kim (Contact Author)

Yonsei University - School of Economics ( email )

Seoul
Korea, Republic of (South Korea)

Myungkyu Shim

Yonsei University - School of Economics ( email )

Seoul
Korea, Republic of (South Korea)

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