Business Faculty Articles and Research Business

Reuven Federal, Reserve Bank, Clas Wihlborg, Reuven Glick, Clas Wihlborg
1985 Journal of Economics   unpublished
We analyze the role of information for price and output adjustment when competitive firms with rational expectations cannot directly distinguish between industrywide and firm-specific cost disturbances. Firms may become informed about industrywide cost conditions by acquiring information at a cost. The sensitivity of price and output to cost disturbances decreases as more firms choose to purchase information. The equilibrium industry share of informed firms increases as the cost of information
more » ... ost of information falls and total cost variability increases. The equilibrium share of informed firms is largest when there is a comparable degree of variability in both industrywide and firm-specific costs.