Endogenous information acquisition and countercyclical uncertainty

We introduce endogenous information acquisition in an otherwise standard business cycle model. In our framework, information is a productive input, which is essentially specialized labor, so information acquisition is linked to the labor market and thereby the macroeconomic condition. Our model demonstrates that strategic complementarity (substitutability) in information acquisition coincides with strategic complementarity (substitutability) in production. Our paper shows that when …rms acquire information optimally, information acquisition is endogenously procyclical and therefore economic uncertainty faced by the …rms is countercyclical. There is a two-way feedback between economic uncertainty and macroeconomic activities, resulting in an ampli…cation e¤ect for TFP shocks and possibly generating multiple equilibria. Our basic model can also be extended to explain countercyclical aggregate volatility. JEL codes: E30, E44, G01 Department of Economics, New York University, 19 West 4th Street, New York, NY 10012, USA. O¢ ce: (212) 998-8971, Fax: (212) 995-4186. Email: [email protected]. yDepartment of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong. Tel: (+852) 2358 7679. Email: [email protected] zDepartment of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong. Tel: (+852) 2358 7612. Email: [email protected]