No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations
Much of the recent research seeking to understand how firms form their expectations and how those expectations affect economic decisions focuses on the aggregate expectations of firms and their response to aggregate shocks. In principle, firms should be observing similar aggregate statistics and therefore forming similar beliefs about the future; however, disagreement among firms about future aggregate conditions is pervasive and large. The authors seek to explain this disagreement by showing that—consistent with an “island” model, in which firms form beliefs about the aggregate using the industry-specific information they are exposed to—firms rely on heterogeneous industry conditions, which are notoriously volatile, to help form beliefs about broader macroeconomic conditions. The source for their findings is a survey of approximately 3,000 French manufacturers that has been running quarterly since 1992.