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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

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Author Info

  • Greg Kaplan

    ()
    (Department of Economics, Princeton University)

  • Guido Menzio

    ()
    (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.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 12-048.

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Length: 56 pages
Date of creation: 12 Dec 2012
Date of revision:
Handle: RePEc:pen:papers:12-048

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Keywords: Self-fulfilling fluctuations; strategic complementarity; unemployment;

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References

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  1. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  2. Mark Aguiar & Erik Hurst & Loukas Karabarbounis, 2013. "Time Use during the Great Recession," American Economic Review, American Economic Association, vol. 103(5), pages 1664-96, August.
  3. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  4. Alan B. Krueger & Andreas Mueller, 2008. "Job Search and Unemployment Insurance: New Evidence from Time Use Data," Working Papers 1070, Princeton University, Department of Economics, Industrial Relations Section..
  5. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  6. Kiyotaki, Nobuhiro, 1988. "Multiple Expectational Equilibria under Monopolistic Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 695-713, November.
  7. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Generalizing the Taylor principle: comment," Working Paper 2008-19, Federal Reserve Bank of Atlanta.
  8. Melvin Stephens, Jr., 2003. "Job Loss Expectations, Realizations, and Household Consumption Behavior," NBER Working Papers 9508, National Bureau of Economic Research, Inc.
  9. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  10. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
  11. Boldrin, Michele & Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A dynamic equilibrium model of search, production, and exchange," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 723-758.
  12. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
  13. Samuel Bentolila & Andrea Ichino, 2008. "Unemployment and consumption near and far away from the Mediterranean," Journal of Population Economics, Springer, vol. 21(2), pages 255-280, April.
  14. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  15. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The unemployed should shop less for bargains, and they would not be unemployed
    by Economic Logician in Economic Logic on 2013-01-28 15:20:00
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Cited by:
  1. Pascal Michaillat & Emmanuel Saez, 2013. "A Model of Aggregate Demand and Unemployment," CEP Discussion Papers dp1235, Centre for Economic Performance, LSE.
  2. Greg Kaplan & Guido Menzio, 2014. "The Morphology of Price Dispersion," NBER Working Papers 19877, National Bureau of Economic Research, Inc.
  3. Sniekers, F.J.T., 2013. "Endogenous Beveridge cycles and the volatility of unemployment," CeNDEF Working Papers 13-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  4. Zhen Huo & Jose-Victor Rios-Rull, 2013. "Paradox of thrift recessions," Staff Report 490, Federal Reserve Bank of Minneapolis.
  5. Greg Kaplan & Guido Menzio, 2013. "The Research Agenda: Greg Kaplan and Guido Menzio on the Macroeconomics of Bargain Hunting," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 14(2), November.
  6. Bonilla, Roberto & Kiraly, Francis, 2013. "Marriage wage premium in a search equilibrium," Labour Economics, Elsevier, vol. 24(C), pages 107-115.

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