Working Paper: NBER ID: w21743
Authors: Mikhail Golosov; Guido Menzio
Abstract: 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.
Keywords: Business cycles; Agency costs; Labor market; Randomization; Coordination
JEL Codes: D86; E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' coordination of firing probabilities based on sunspots (C72) | reduction in agency costs (G34) |
| firms' coordination of firing probabilities based on sunspots (C72) | aggregate fluctuations in employment levels (E24) |
| correlated randomization strategies of firms (C69) | endogenous fluctuations in the economy (E32) |
| unemployment rate (J64) | probability of a recession (E37) |
| probability of a recession (E37) | unemployment rate (J64) |