Aggregate shocks or aggregate information? Costly information and business cycle comovement

Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous explanations emphasized production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost of production and a low marginal cost of replication, sectors can share the cost of acquiring aggregate information, rather than each paying the full production cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated production choices. By filtering out sector-specific shocks and transmitting aggregate ones, information markets amplify business-cycle comovement. (C) 2007 Elsevier B.V. All rights reserved.