Information Choice and Shock Transmission

45 Pages Posted: 29 Oct 2022

Date Written: March 23, 2022

Abstract

The paper proposes an information-based theory of shock transmission which explains how the impact of a shock can decrease with exposure to it. I develop a model in which decision-makers learn about the risk factors they are exposed to, but have limited capacity to process information. I find that decision-makers optimally learn more about the risk factors they are more exposed to, which enables them to mitigate the direct impact of shocks by minimizing the loss due to suboptimal action. On the other hand, the impact of shocks to risk factors that they are relatively less exposed to is amplified through their poorly informed decision-making.

Keywords: Rational Inattention, Corporate Investment, Shock Amplification

JEL Classification: G01, G30, D81, D83

Suggested Citation

Barbalau, Adelina, Information Choice and Shock Transmission (March 23, 2022). Available at SSRN: https://ssrn.com/abstract=4258447 or http://dx.doi.org/10.2139/ssrn.4258447

Adelina Barbalau (Contact Author)

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

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