Knut Niemann

To shed light on the expectation formation of firms, we use firm-level data and examine how expectations adjust to news. We classify news as either micro (firm-specific developments) or macro (information about the aggregate economy). Analyzing survey data from Italian and German firms, we consistently find that expectations overreact to micro news but underreact to macro news. Our empirical specification is based on a stylized model of ‘island illusion,’ because of which firms systematically underestimate the importance of aggregate developments for their own performance. This illusion has aggregate implications, which we derive by embedding it into the canonical noisy-information model.

Geographic political sorting has intensified in the United States, raising the question whether political events shape internal migration in ways that reinforce it. Combining annual county-to-county Internal Revenue Service migration flows with 45 U.S. gubernatorial elections decided by less than five percentage points between 1994 and 2014, we compare locally losing and winning counties in stacked event studies. During the first five post-election years, outmigration from losing counties rises by 3.21 percent relative to winning counties. Conditional on total departures and destination shocks, migration from losing counties shifts by 4.02 percent toward strongholds of the losing party relative to winner-party strongholds. The increase in outmigration is concentrated in races with large candidate-ideology gaps, consistent with larger political shocks moving more residents across the migration threshold. A migration-selection model rationalizes both margins, while gravity estimates showing less migration between politically distant states provide corroborating evidence. Together, the results show that political events can redirect internal migration in a direction consistent with greater geographic sorting.

How do exporters in a small open economy respond to foreign tariff changes? We link Danish customs records, firm balance sheets, and destination-specific tariffs from 1993 to 2021. Comparing the same firm's exports of a product across destinations, we use local projections to trace adjustments in export revenues, quantities, and unit values. Preliminary results suggest that higher foreign tariffs reduce both quantities and export unit values, consistent with exporters absorbing part of the tariff increase. We also examine employment, investment, and destination diversification, with initial evidence pointing to limited domestic adjustment and possible expansion into additional markets.

This chapter revisits survey evidence about firm expectations, with a particular focus on firms' production and prices. We aim at synthesizing the evidence established on the basis of various firm surveys from different countries. We complement our discussion of existing work with new evidence based on the ifo Survey of German firms. This allows us, first, to put together five stylized facts regarding firm expectations and expectation errors. In addition, we present new evidence regarding the stickiness of firm expectations. Second, we use the same data set to revisit key results regarding the formation of firm expectations. Firm expectations react strongly to firm-specific developments, whereas aggregate variables are less important. Third, we summarize the evidence on how firm expectations drive firm decisions.