The Devil is in the Tail: Macroeconomic Tail Risk Expectations of Firms
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This paper examines novel survey evidence on firms’ beliefs about macroeconomic tail risk and their role in investment decisions. In a large survey of firms, I elicit the subjective probability of a severe macroeconomic downturn and firms’ exposure to such events. Using observational and experimental variation, I find that a higher probability of a severe macroeconomic downturn substantially lowers investment, particularly for more exposed firms, beyond what can be explained by changes in firms’ subjective first and second moments. In a heterogeneous firm model calibrated to the survey evidence, tail risk concerns make fiscal policy particularly effective for stabilizing investment.
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The University of Michigan is a public research university in Ann Arbor, Michigan, United States. It was founded in 1817 and is the oldest institution of higher education in the state. It is also one of the earliest American research universities and is a founding member of the Association of American Universities. Read more on Wikipedia
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