Does Higher Firm Profit Dispersion Reflect Greater Micro Uncertainty?

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