Agency business cycles

Mikhail Golosov and Guido Menzio

Theoretical Economics, 2020, vol. 15, issue 1

Abstract: We develop a theory of endogenous and stochastic fluctuations in economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex-ante incentive to exert effort. Different firms choose to correlate the outcome of their randomization to reduce the probability with which they fire non-performing workers. Correlated randomization leads to aggregate fluctuations. Aggregate fluctuations are endogenous---they emerge because firms choose to randomize and they choose to randomize in a correlated fashion---and they are stochastic---they are the manifestation of a randomization process. The hallmark of a theory of endogenous and stochastic fluctuations is that the stochastic process for aggregate "shocks" is an equilibrium object.

Keywords: Endogenous and stochastic cycles; coordinated randomization; unemployment fluctuations (search for similar items in EconPapers)
JEL-codes: D86 E24 E32 (search for similar items in EconPapers)
Date: 2020-02-03
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Agency Business Cycles (2016)
Working Paper: Agency Business Cycles (2015)
Working Paper: Agency Business Cycles (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:3379

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