Co-authors: Jonas Dovern, Lena Sophia Müller, and Klaus Wohlrabe
Using new survey data on quantitative growth expectations of firms in Germany, we show that firms resort to local information when forming expectations about aggregate growth. Firms extrapolate from the economic situation in their county, industry growth and their individual business situation. The effect is particularly strong for small firms and explains part of the the high dispersion across firms. These findings support models with information frictions, especially island-type models where firms use information from their local environment to draw conclusions about aggregate economic conditions. Pre COVID-19, growth expectations were correlated with firms’ changes in employee numbers and plans for investment, highlighting that differences in expectations do lead to differences in actual firm decisions.