Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/71170 
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4176
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Are firms` expectations systematically too optimistic or too pessimistic? Does it matter? We use micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors. We find that depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller.
Subjects: 
survey data
expectation errors
expectation biases
optimism
pessimism
firm data
heterogeneous firms
JEL: 
D22
D84
E20
E22
Document Type: 
Working Paper
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