Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

56 Pages Posted: 14 Dec 2012

See all articles by Greg Kaplan

Greg Kaplan

Princeton University - Department of Economics

Guido Menzio

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2012

Abstract

We propose a novel theory of self-fulfilling fluctuations in the labor market. A firm employing an additional worker generates positive externalities on other firms, because employed workers have more income to spend and have less time to shop for low prices than unemployed workers. We quantify these shopping externalities and show that they are sufficiently strong to create strategic complementarities in the employment decisions of different firms and to generate multiple rational expectations equilibria. Equilibria differ with respect to the agents’ (rational) expectations about future unemployment. We show that negative shocks to agents’ expectations lead to fluctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession.

Keywords: Self-fulfilling fluctuations, strategic complementarity, unemployment

JEL Classification: D11, D21, D43, E32

Suggested Citation

Kaplan, Greg and Menzio, Guido, Shopping Externalities and Self-Fulfilling Unemployment Fluctuations (December 12, 2012). PIER Working Paper No. 12-048. Available at SSRN: https://ssrn.com/abstract=2188380 or http://dx.doi.org/10.2139/ssrn.2188380

Greg Kaplan

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Guido Menzio (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-5170 (Phone)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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