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Agency Business Cycles

Author

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  • Mikhail Golosov

    () (Department of Economics, University of Chicago)

  • Guido Menzio

    (Department of Economics, University of Pennsylvania)

Abstract

We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations.

Suggested Citation

  • Mikhail Golosov & Guido Menzio, 2015. "Agency Business Cycles," PIER Working Paper Archive 15-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Nov 2015.
  • Handle: RePEc:pen:papers:15-038
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    References listed on IDEAS

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    1. Beaudry, Paul & Galizia, Dana & Portier, Franck, 2015. "Reviving the Limit Cycle View of Macroeconomic Fluctuations," CEPR Discussion Papers 10645, C.E.P.R. Discussion Papers.
    2. John Kennan, 2010. "Private Information, Wage Bargaining and Employment Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 633-664.
    3. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    4. Menzio, Guido & Shi, Shouyong, 2010. "Block recursive equilibria for stochastic models of search on the job," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1453-1494, July.
    5. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    6. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    7. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
    8. Greg Kaplan & Guido Menzio, 2016. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 771-825.
    9. Boldrin, Michele & Woodford, Michael, 1990. "Equilibrium models displaying endogenous fluctuations and chaos : A survey," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 189-222, March.
    10. Boyan Jovanovic, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 395-409.
    11. repec:pri:cepsud:234kaplan is not listed on IDEAS
    12. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-690, September.
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    Cited by:

    1. Jan Eeckhout & Ilse Lindenlaub, 2015. "Unemployment cycles," IFS Working Papers W15/26, Institute for Fiscal Studies.

    More about this item

    Keywords

    Unemployment; Moral Hazard; Endogenous Business Cycles;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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