Information acquisition and learning from prices over the business cycle

We study firms' incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles. Our model predicts that, for a wide range of parameter values, firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief. The equilibrium price system, which features endogenous information transmission, dampens aggregate fluctuations by discouraging information acquisition. Our welfare analysis reveals that information acquisition in the decentralized economy is not efficient. This is due to inefficient employment dispersion, arising from information heterogeneity in equilibrium. Time series data for the U.S. economy support the model's prediction of wages being more informative about total factor productivity after recessions than following booms. (C) 2015 Elsevier Inc. All rights reserved.