Agency business cycles

Mikhail Golosov, Guido Menzio

    Research output: Contribution to journalArticle

    Abstract

    We develop a theory of endogenous and stochastic fluctuations in economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex ante incentive to exert effort. Different firms choose to correlate the outcome of their randomization to reduce the probability with which they fire nonperforming workers. Correlated randomization leads to aggregate fluctuations. Aggregate fluctuations are endogenous—they emerge because firms choose to randomize and they choose to randomize in a correlated fashion—and they are stochastic—they are the manifestation of a randomization process. The hallmark of a theory of endogenous and stochastic fluctuations is that the stochastic process for aggregate “shocks” is an equilibrium object.

    Original languageEnglish (US)
    Pages (from-to)123-158
    Number of pages36
    JournalTheoretical Economics
    Volume15
    Issue number1
    DOIs
    StatePublished - Jan 1 2020

    Keywords

    • D86
    • E24
    • E32
    • Endogenous and stochastic cycles
    • coordinated randomization
    • unemployment fluctuations

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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  • Cite this

    Golosov, M., & Menzio, G. (2020). Agency business cycles. Theoretical Economics, 15(1), 123-158. https://doi.org/10.3982/TE3379