Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

Greg Kaplan and Guido Menzio

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We propose a novel theory of self-fulfilling fluctuations in the labor market. A firm employing an additional worker generates positive externalities on other firms, because employed workers have more income to spend and have less time to shop for low prices than unemployed workers. We quantify these shopping externalities and show that they are sufficiently strong to create strategic complementarities in the employment decisions of different firms and to generate multiple rational expectations equilibria. Equilibria differ with respect to the agents’ (rational) expectations about future unemployment. We show that negative shocks to agents’ expectations lead to fluctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession.

Keywords: Self-fulfilling fluctuations; strategic complementarity; unemployment (search for similar items in EconPapers)
JEL-codes: D11 D21 D43 E32 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2012-12-12
New Economics Papers: this item is included in nep-dge, nep-lab and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (84)

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Related works:
Journal Article: Shopping Externalities and Self-Fulfilling Unemployment Fluctuations (2016)
Working Paper: Shopping Externalities and Self-Fulfilling Unemployment Fluctuations (2013)
Working Paper: Shopping Externalities and Self-Fulfilling Unemployment Fluctuations (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:12-048

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