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)
Stanford University - Department of Economics
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, D22working papers series
Date posted: July 8, 2013 ; Last revised: November 23, 2014
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