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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

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Author Info

  • Greg Kaplan

    (Princeton University)

  • Guido Menzio

    (University of Pennsylvania)

Abstract

We propose a novel theory of self-ful?lling ?uctuations in the labor market. A ?rm employing an additional worker generates positive externalities on other ?rms, 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 su¢ ciently strong to create strategic complementarities in the employment decisions of di¤erent ?rms and to generate multiple rational expectations equilibria. Equilibria di¤er with respect to the agents?(rational) expectations about future unemployment. We show that negative shocks to the agents?expectations lead to ?uctuations 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 Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1461.

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Date of creation: May 2013
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Handle: RePEc:pri:cepsud:234kaplan

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Keywords: vacancies; unemployment; labor productivity; stock market; Great Recession;

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References

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  1. Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
  2. 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.
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  5. Kiyotaki, Nobuhiro, 1988. "Multiple Expectational Equilibria under Monopolistic Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 695-713, November.
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  7. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  8. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  9. 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.
  10. 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.
  11. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  12. Melvin Stephens, Jr., 2003. "Job Loss Expectations, Realizations, and Household Consumption Behavior," NBER Working Papers 9508, National Bureau of Economic Research, Inc.
  13. 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.
  14. 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.
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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. Zhen Huo & José-Víctor Ríos-Rull, 2013. "Paradox of Thrift Recessions," NBER Working Papers 19443, National Bureau of Economic Research, Inc.
  2. Bonilla, Roberto & Kiraly, Francis, 2013. "Marriage wage premium in a search equilibrium," Labour Economics, Elsevier, vol. 24(C), pages 107-115.
  3. Michaillat, Pascal & Saez, Emmanuel, 2013. "A Model of Aggregate Demand and Unemployment," CEPR Discussion Papers 9609, C.E.P.R. Discussion Papers.
  4. Greg Kaplan & Guido Menzio, 2014. "The Morphology of Price Dispersion," NBER Working Papers 19877, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.

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