SMU SOE Seminar (Apr 26, 2017): Churning, Firm Inter-connectivity, and Labor Market Fluctuations

In the US, during downturns of economic activity, firms change their profit rankings more often. Motivated by this fact, this paper studies the effect of firms' transitions in profit distributions, or churning, on the business cycle through the lens of a Diamond-Mortenson-Pissarides search and matching model. The main prediction of the model is that an increase in the churning of an industry causes a recession within the industry and in its linked industries, which is consistent with the evidence I document in the paper. The model's key mechanism, furthermore, is supported by microeconomic evidence.

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