Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

57 Pages Posted: 9 Feb 2013

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)

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Date Written: February 2013

Abstract

We propose a novel theory of self-fulfilling unemployment fluctuations. According to this theory, a firm hiring an additional worker creates positive external effects on other firms, as a worker has more income to spend and less time to search for low prices when he is employed than when he is unemployed. In response to the increase in demand and prices, other firms enter or increase their presence in the product market by hiring additional workers. We quantify the external effects of employment on demand and prices and show that they are sufficiently strong to generate multiple rational expectations equilibria and, hence, self-fulfilling economic fluctuations.

Suggested Citation

Kaplan, Greg and Menzio, Guido, Shopping Externalities and Self-Fulfilling Unemployment Fluctuations (February 2013). NBER Working Paper No. w18777. Available at SSRN: https://ssrn.com/abstract=2214246

Greg Kaplan (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Guido Menzio

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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