Obtaining Data and the Finance Dilemma Caused by Uncertainty
In a groundbreaking study published by the Federal Reserve Bank of San Francisco, a team of economists led by Dong, Ding, Allen Hu, Zhaorui Li, and Zheng Liu have shed light on a significant and intricate feedback loop between firms' credit access and information acquisition. The paper, titled "Information Acquisition and the Finance-Uncertainty Trap," was published as a Federal Reserve Bank of San Francisco Working Paper under the reference number WP2025-12.
The authors have developed a general equilibrium model that incorporates financial frictions and endogenous information acquisition, aligning with their empirical findings on this feedback loop. This model aims to provide a more comprehensive understanding of how this dynamic interplay affects the economy.
The central mechanism at play is that when information acquisition costs rise, firms face increased uncertainty. This uncertainty, in turn, lowers their equity value and restricts their credit access. This reduced credit availability disproportionately impacts high-productivity firms that need external finance to invest and grow.
When efficient firms cannot fully exploit their potential due to tightened credit constraints, it leads to a misallocation of resources across the economy. This misallocation reduces overall aggregate productivity and firm profitability. This decline in productivity and profits discourages firms from acquiring costly information, further increasing uncertainty and perpetuating the cycle.
Thus, the economy can get trapped in a finance-uncertainty trap that amplifies and lengthens economic fluctuations, worsening business cycles. This trap describes how financial frictions and information frictions do not just coexist but reinforce each other, leading to more severe economic downturns and slower recoveries than otherwise expected.
The authors argue that this feedback between credit access and information acquisition generates endogenous uncertainty and misallocation at the macro level. This interaction creates a powerful amplifier of business cycle volatility with large implications for financial regulation and policies aimed at alleviating credit constraints or reducing information costs.
The paper's Digital Object Identifier (DOI) is 10.24148/wp2025-12, and it was published in 2025. The paper's title, "Information Acquisition and the Finance-Uncertainty Trap," captures the essence of the study's findings and its potential impact on our understanding of economic fluctuations.
The authors' model, involving financial frictions and endogenous information acquisition, (finance, business) provides insights into the feedback loop connecting firms' credit access and information acquisition, primarily affecting high-productivity businesses. This interplay, resulting in a misallocation of resources and finance-uncertainty trap, (business) has significant implications for financial regulation and policies aimed at alleviating credit constraints or reducing information costs.
