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Agency Business Cycles

Author

Listed:
  • Guido Menzio

    (University of Pennsylvania)

  • Mikhail Golosov

    (Princeton University)

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

  • Guido Menzio & Mikhail Golosov, 2016. "Agency Business Cycles," 2016 Meeting Papers 740, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:740
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    References listed on IDEAS

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    Cited by:

    1. Jan Eeckhout & Ilse Lindenlaub, 2019. "Unemployment Cycles," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 175-234, October.
    2. Paolo Martellini & Guido Menzio & Ludo Visschers, 2021. "Revisiting the Hypothesis of High Discounts and High Unemployment," Economic Journal, Royal Economic Society, vol. 131(637), pages 2203-2232.

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    More about this item

    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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