Agency Business Cycles

Mikhail Golosov, Guido Menzio

NBER Working Paper No. 21743
Issued in November 2015
NBER Program(s):Economic Fluctuations and Growth

We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations.

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Document Object Identifier (DOI): 10.3386/w21743

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