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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

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  • Greg Kaplan
  • Guido Menzio

Abstract

We propose a novel theory of self-fulfilling unemployment fluctuations. According to this theory, a firm hiring an additional worker creates positive external effects on other firms, as a worker has more income to spend and less time to search for low prices when he is employed than when he is unemployed. In response to the increase in demand and prices, other firms enter or increase their presence in the product market by hiring additional workers. We quantify the external effects of employment on demand and prices and show that they are sufficiently strong to generate multiple rational expectations equilibria and, hence, self-fulfilling economic fluctuations.

Suggested Citation

  • Greg Kaplan & Guido Menzio, 2013. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," NBER Working Papers 18777, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18777
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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