Essays on Frictions and Economic Fluctuations
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I study how information frictions, in the forms of limited information capacity or asymmetric information, affects the firm's production and physical capital accumulation decisions, and how it can help a dynamic general equilibrium model to account for selected empirical characteristics over business cycle frequencies. In the first chapter, I explore how limited information capacity affects fished-good inventory accumulation by firms. I use rational inattention to understand the responses of inflation and output inventories after nominal shocks. In the data, output inventories move less than sales in the U.S. manufacturing and trade sectors. To reconcile the model with the data, some studies have suggested that variation in price markups, rather than cost rigidities, must account for the bulk of the real effects of nominal shocks. I propose that this conclusion does not necessarily hold when the firm’s decisions are affected by an information capacity constraint. In my model, firms observe aggregate conditions with idiosyncratic noise. Paying more attention helps a decision maker to reduce the noise, but also incurs information costs. Firms allocate their attention between pricing and production decisions, and their decision rules deviate from the first-best rules. This friction serves as a force to hinder drastic movements in production and inventory accumulation. I show that inventories can move less than sales even when the marginal cost of production is rigid. Numerical results suggest that inattention on the firm side can qualitatively match empirical impulse responses and business cycle moments. The fit with data is better than a staggered pricing model with elastic cost pressure, in terms of both matching impulse responses and simulated moments. In the second chapter, I study how information asymmetry about the quality of used capital affects capital reallocation. Empirical studies of business cycle dynamics indicate that the reallocation of capital, or the movement of capital input from less productive firms to more efficient firms, is procyclical, whereas the dispersion of marginal product of capital is countercyclical. I build a model of endogenous partial capital irreversibility, which stems from both capital specificity and information asymmetry in the market for used capital. The resale price and average quality of used capital in the market vary with aggregate productivity shocks. In the model, imperfect substitution between new and used capital and information asymmetry interact to generate procyclical reallocation. Preliminary numerical results show procyclical reallocation and countercyclical dispersion of capital returns.