DP4076 The Informational Role of the Business Cycle

Author(s): Harris Dellas

Publication Date: October 2003

Keyword(s): business cycles , incomplete information , matching , comparative advantage , stabilization

JEL(s): D83 , E32 , E60

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4076.asp

Economic decisions such as occupational and entrepreneurial choices may violate true comparative advantage when economic agents are uncertain about which activity best matches their talents. If relative performance varies over the business cycle (for instance, if downturns affect disproportionately those who are pursuing the wrong activity), then economic fluctuations may affect the probability and persistence of resource mismatches. The present work offers a novel, informational perspective to the business cycle and provides a link between aggregate fluctuations and the long-term allocation of resources.