Aggregate demand shocks, private signals and employment variability: Can better information be harmful?

The consequences of private information concerning the realization of aggregate demand shocks are investigated in the context of a standard macroeconomic model. It is found that an improvement in information quality can be damaging, in the sense of amplifying employment fluctuations. The source of this result is an externality arising from individual firm wage decisions, which leads to a collective over-reaction to private information.