Abstract

http://ssrn.com/abstract=2263501
 


 



A Forest Fire Theory of the Duration of a Boom and the Size of a Subsequent Bust


Matthew O. Jackson


Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Pietro Tebaldi


Stanford University - Department of Economics

November 2014


Abstract:     
We introduce a model of matching from firms' perspectives (that nests standard search models as
special cases), and show that it yields non-stationary use of capital and labor in response to stationary exogenous shocks. In presence of search frictions, in high-demand states firms prefer to hire a low productivity worker or use an inferior technology than to be idle. Thus, bad matches accumulate during upswings, leading to drops in employment and the use of other factors that are positively related to the length of the upswing when a negative shock eventually hits: the longer since the last downturn, the larger (absolute and percentage) drop in the employment of capital and labor. We also provide first empirical evidence for this phenomenon.

Number of Pages in PDF File: 51

Keywords: recessions, employment, unemployment, matching, search, business cycles, macro-dynamics

JEL Classification: E24, E32, D92, D21, D22

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Date posted: July 8, 2013 ; Last revised: November 23, 2014

Suggested Citation

Jackson, Matthew O. and Tebaldi, Pietro, A Forest Fire Theory of the Duration of a Boom and the Size of a Subsequent Bust (November 2014). Available at SSRN: http://ssrn.com/abstract=2263501 or http://dx.doi.org/10.2139/ssrn.2263501

Contact Information

Matthew O. Jackson (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)
HOME PAGE: http://www.stanford.edu/~jacksonm
Santa Fe Institute
1399 Hyde Park Road
Santa Fe, NM 87501
United States
Canadian Institute for Advanced Research (CIFAR) ( email )
180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada
Pietro Tebaldi
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
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