Uncertainty, Imperfect Information, and Learning in the International Market

Author Name CHEN Cheng (University of Hong Kong) / SENGA Tatsuro (Fellow, RIETI) / SUN Chang (University of Hong Kong) / ZHANG Hongyong (Fellow, RIETI)
Creation Date/NO. March 2018 18-E-010
Research Project Studies on Firm Management and Internationalization under the Growing Fluidity of the Japanese Economy
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First Draft: March 2018
Revised: May 2019


Using a dataset of Japanese multinational firms that contains firm-level sales forecasts, we provide new evidence on imperfect information and learning over the firm's life cycle. We find that firms make non-negligible and positively correlated forecast errors over time. However, they make more precise forecasts and less correlated forecast errors, as they become more experienced. We then build a model with heterogeneous firms that gradually learn about their demand. We quantify the learning and real options channels along the age dimension, through which greater micro-level uncertainty adversely affects resource allocation at the extensive margin and thus depresses productivity.