TY  - JOUR
AU  - Kaplan,Greg
AU  - Menzio,Guido
TI  - Shopping Externalities and Self-Fulfilling Unemployment Fluctuations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18777
PY  - 2013
Y2  - February 2013
UR  - http://www.nber.org/papers/w18777
L1  - http://www.nber.org/papers/w18777.pdf
N1  - Author contact info:
Greg Kaplan
Department of Economics
Princeton University
Fisher Hall
Princeton, NJ 08544
Tel: 609/258-4000
Fax: 609/258-6419
E-Mail: gkaplan@princeton.edu

Guido Menzio
Department of Economics
University of Pennsylvania
467 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: 773/865-6337
Fax: 215/573-2057
E-Mail: gmenzio@econ.upenn.edu
AB  - 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 the 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.
ER  -