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Shopping externalities and self-fulfilling unemployment fluctuations

Author(s): Kaplan, Greg; Menzio, G

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Abstract: © 2016 by The University of Chicago. All rights reserved. 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.
Publication Date: 3-May-2016
Citation: Kaplan, G, Menzio, G. (2016). Shopping externalities and self-fulfilling unemployment fluctuations. Journal of Political Economy, 124 (3), 771 - 825. doi:10.1086/685909
DOI: doi:10.1086/685909
ISSN: 0022-3808
EISSN: 1537-534X
Pages: 771 - 825
Type of Material: Journal Article
Journal/Proceeding Title: Journal of Political Economy
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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