Information Acquisition and the Finance-Uncertainty Trap

RePEc Short ID: pli18
ORCID iD: 0000-0003-2073-0898

Dong, Ding; Hu, Allen; Li, Zhaorui; Liu, Zheng

doi:10.24148/wp2025-12

Working Paper

Information Acquisition and the Finance-Uncertainty Trap

Abstract: Using novel measures of information acquisition, we document causal evidence of a feedback loop between firms’ credit access and information acquisition. To examine the macroeconomic implications of this feedback loop, we develop a tractable general equilibrium framework with financial frictions and endogenous information acquisition. In line with the empirical evidence, the model predicts that a rise in information costs raises the level of uncertainty and reduces a firm’s equity value, hampering its credit access. On the other hand, tightened credit constraints restrain activity of high-productivity firms, leading to misallocation that reduces aggregate productivity and firm profits, and discouraging information acquisition. This feedback loop creates a finance-uncertainty trap that substantially amplifies and prolongs business cycle fluctuations.

JEL Classification: D83; E32; E44;

https://doi.org/10.24148/wp2025-12