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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

  • Greg Kaplan
  • Guido Menzio

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18777.

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Date of creation: Feb 2013
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Handle: RePEc:nbr:nberwo:18777
Note: EFG
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