American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Endogenous Disasters
American Economic Review
vol. 108,
no. 8, August 2018
(pp. 2212–45)
Abstract
Market economies are intrinsically unstable. The standard search model of equilibrium unemployment, once solved accurately with a globally nonlinear algorithm, gives rise endogenously to rare disasters. Intuitively, in the presence of cumulatively large negative shocks, inertial wages remain relatively high, and reduce profits. The marginal costs of hiring run into downward rigidity, which stems from the trading externality of the matching process, and fail to decline relative to profits. Inertial wages and rigid hiring costs combine to stifle job creation flows, depressing the economy into disasters. The disaster dynamics are robust to extensions to home production, capital accumulation, and recursive utility.Citation
Petrosky-Nadeau, Nicolas, Lu Zhang, and Lars-Alexander Kuehn. 2018. "Endogenous Disasters." American Economic Review, 108 (8): 2212–45. DOI: 10.1257/aer.20130025Additional Materials
JEL Classification
- E22 Investment; Capital; Intangible Capital; Capacity
- E23 Macroeconomics: Production
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- J41 Labor Contracts
- J63 Labor Turnover; Vacancies; Layoffs
- N12 Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: 1913-