Shopping externalities and self-fulfilling unemployment fluctuations

Greg Kaplan, Guido Menzio

    Research output: Contribution to journalArticle

    Abstract

    We propose a theory of self-fulfilling unemployment fluctuations. Whena firm increases its workforce, it raises demand and weakens competition facing other firms, as employed workers spend more and have less time to search for low prices than unemployed workers. These effects induce other firms to hire more labor in order to scale up their presence in the product market. The feedback between employment and product market conditions generates multiple equilibria—and the possibility of self-fulfilling fluctuations—if differences in shopping behavior between employed and unemployed are large enough. Evidence on spending, shopping, and prices suggests that this is the case.

    Original languageEnglish (US)
    Pages (from-to)771-825
    Number of pages55
    JournalJournal of Political Economy
    Volume124
    Issue number3
    DOIs
    StatePublished - Jun 2016

    ASJC Scopus subject areas

    • Economics and Econometrics

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