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Business Uncertainty in Developing and Emerging Economies

Author

Listed:
  • Edgar Avalos
  • Jose Maria Barrero
  • Elwyn Davies
  • Leonardo Iacovone
  • Jesica Torres

Abstract

We study business uncertainty in high- versus low-volatility environments by surveying over 31,000 managers across 41 countries. We elicit subjective probability distributions for future own-firm sales and measure firm-level uncertainty with their mean absolute deviations. Analogously, we measure realized volatility using absolute forecast errors. We establish two new facts. (1) Subjective uncertainty and realized volatility both decline with GDP per capita. (2) Managers underestimate volatility everywhere (they are overprecise), but more so in low-volatility rich countries. We build a heterogeneous-firm dynamic model and show that our facts imply larger TFP gaps between the US and developing/emerging economies. In the model, high volatility generates investment and growth opportunities in poor countries. But high uncertainty and low overprecision slow reallocation and pull down poor-country output. Quantitatively, the volatility effect dominates, so we infer 30 to 40% lower TFP in poor countries to reconcile their high volatility and low GDP per capita.

Suggested Citation

  • Edgar Avalos & Jose Maria Barrero & Elwyn Davies & Leonardo Iacovone & Jesica Torres, 2024. "Business Uncertainty in Developing and Emerging Economies," CESifo Working Paper Series 11368, CESifo.
  • Handle: RePEc:ces:ceswps:_11368
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    References listed on IDEAS

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    1. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741, Elsevier.
    2. Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2020. "Inflation Expectations and Firm Decisions: New Causal Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 165-219.
    3. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 5266, London School of Economics and Political Science, LSE Library.
    4. Yueran Ma & Tiziano Ropele & David Sraer & David Thesmar, 2020. "A Quantitative Analysis of Distortions in Managerial Forecasts," NBER Working Papers 26830, National Bureau of Economic Research, Inc.
    5. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
    6. Felix Gerding & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    managers; uncertainty; volatility; aggregate TFP; real options; development accounting;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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