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Incomplete Information and Investment Inaction

Author

Listed:
  • Jonathan J Adams

    (Department of Economics, University of Florida)

  • Cheng Chen

    (Clemson University)

  • Min Fang

    (Department of Economics, University of Florida)

  • Takahiro Hattori

    (University of Tokyo)

  • Eugenio Rojas

    (Department of Economics, University of Florida)

Abstract

How do investment friction and information frictions interact? We study this question in a stylized continuous time model of heterogeneous firms facing incomplete information and irreversible investment. We analytically characterize how the information friction distorts firms' decision rules and stationary distribution. The two frictions interact in rich and substantial ways. At the firm level, noisier information shrinks a firm's inaction region and reduces the elasticity of investment to productivity. In the aggregate, it increases steady-state capital, increases capital misallocation, and attenuates the effect of productivity shocks on investment. Finally, we test and confirm these predictions using Japanese administrative data that match firms' forecasts to their balance sheets, incomes, and expenditures.

Suggested Citation

  • Jonathan J Adams & Cheng Chen & Min Fang & Takahiro Hattori & Eugenio Rojas, 2024. "Incomplete Information and Investment Inaction," Working Papers 001013, University of Florida, Department of Economics.
    • Handle: RePEc:ufl:wpaper:001013
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4945647
    File Function: First version, 09-03-2024
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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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