Open AccessAgency business cycles
Author(s) -
Golosov Mikhail,
Menzio Guido
Publication year - 2020
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te3379
Subject(s) - ex ante , aggregate (composite) , economics , econometrics , agency (philosophy) , incentive , principal–agent problem , business cycle , randomization , stochastic process , outcome (game theory) , microeconomics , mathematics , statistics , randomized controlled trial , finance , macroeconomics , medicine , corporate governance , philosophy , materials science , surgery , epistemology , composite material
We develop a theory of endogenous and stochastic fluctuations in economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex ante incentive to exert effort. Different firms choose to correlate the outcome of their randomization to reduce the probability with which they fire nonperforming workers. Correlated randomization leads to aggregate fluctuations. Aggregate fluctuations are endogenous—they emerge because firms choose to randomize and they choose to randomize in a correlated fashion—and they are stochastic—they are the manifestation of a randomization process. The hallmark of a theory of endogenous and stochastic fluctuations is that the stochastic process for aggregate “shocks” is an equilibrium object.