Low, William
(1997)
Expectations and U.K. firms' employment and production plans: Microeconometric analysis of the CBI's business survey.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis uses the opinions of U.K. business managers about past and future trends in key economic variables to test a number of basic economic theories of firm behaviour: the decision to hire labour, to expand production, and to change prices. Individual qualitative responses from the Confederation of British Industry's quarterly Industrial Trends Survey from September 1982 to January 1984 are used to determine if firms act on expectations in the manner predicted by economic theory, that is, firms should adjust their behaviour in accordance to expected changes in external business conditions. Access to individual firms' responses over consecutive surveys results in data on both plans and expectations formulated in one period, and the realizations of those plans and expectations in the next period. The qualitative responses are used in ordered probit and conditional log-linear models to determine how expectations of external factors shape a firm's plan, as well as to determine why a firm did not follow through on its plan. Overall, the role of expectations in economic decision-making are confirmed. Firms plan to hire and to raise production if demand conditions are expected to improve, and vice versa. Firms plan to raise prices if cost conditions are expected to worsen, and vice versa. The fulfillment of plans is contingent on "errors" in forecasting external conditions. Firms adjust their plans in the manner that economic theory predicts if conditions differ from what was originally predicted. These conclusions applied whether the data was all firms in the sample (roughly 9000) or a special sub-sample of firms (roughly 550) which responded to all six quarterly surveys.
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