Business Uncertainty in Developing and Emerging Economies

We study business uncertainty in high- and low-volatility environments by surveying over 31,000 managers across 41 countries. We elicit subjective probability distributions for future own-firm sales and measure firm-level uncertainty with their mean absolute deviations. Analogously, we measure realized volatility using absolute forecast errors. We establish two new facts. (1) Subjective uncertainty and realized volatility both decline with GDP per capita. (2) Managers underestimate volatility everywhere (they are overprecise), but more so in low-volatility rich countries. Quantifying a heterogeneous-firm dynamic model to match our facts, we show they imply larger TFP gaps between the US and developing/emerging economies. High volatility in poor countries creates investment and growth opportunities there. High overprecision in rich ones boosts reallocation because managers undervalue investment and liquidation options. Quantitatively, the volatility effect dominates, so we need up to 35% lower TFP in poor countries to reconcile their high volatility and low GDP per capita.