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

February 2015


Abstract:     
We analyze a class of models of matching from firms' perspectives (that nest most standard search models), and show that all such models yield nonstationary use of inputs in response to stationary exogenous shocks. Focusing on labor search as a leading example, in presence of search frictions, firms prefer to hire low productivity workers in high-demand states to take advantage of current profit opportunities. This implies that bad matches accumulate during upswings, leading to drops in employment, and other inputs, 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 labor and capital inputs.

We complement this theoretical result along with empirical evidence for this phenomenon, using US micro-data. We find that five additional years of expansion lead to an additional drop of thirty percent in employment growth at the onset of a downturn.

Number of Pages in PDF File: 52

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: February 16, 2015

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 (February 2015). 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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