Cyclical Dynamics of Shopping: Aggregate Implications of Goods and Labor Markets

Abstract

In this paper, I study the effects of consumers’ shopping effort behavior on aggregate business cycle dynamics. Literature shows that employed individuals search less and pay higher prices for identical goods than unemployed individuals. In addition to this result, using micro-level data, I find that shopping effort of consumers is procyclical, and the procyclicality is more pronounced for the unemployed individuals than employed ones. To explain these empirical facts and study the effects of them on the dynamics of aggregate variables, I build a model of endogenous price hunting in decentralized labor and product markets. I show that an individual buyer exerts less effort in looking for lower prices if the buyer i) has a higher income or ii) is less likely to find lower prices when facing lower price dispersion. Since the return to shopping is procyclical, unemployed buyers exhibit greater procyclicality. The procyclical shopping effort makes firms post relatively greater vacancies in recession than the model with fixed effort as they can post relatively higher prices. I find that while differential shopping behavior of the unemployed and employed amplify the volatilities of aggregate variables, procyclical shopping effort dampens this effect. The model also predicts that price rigidity depends on wage rigidity. I provide empirical evidence for these effects using the time use survey and the scanner data.

Keywords: Price Search, Unemployment, Business Cycle

JEL Classification: E31, E32, J64