We study an economy in which producers incur resource costs to replace depreciated machines. The process of costly replacement and depreciation creates endogenous fluctuations in productivity, employment, and output of a single producer. We explore the spillover effects of machine replacement on other sectors of the economy and provide conditions for synchronized machine replacement by multiple independent producers. The implications of our model are generally consistent with observed monthly output, employment, and productivity fluctuations in automobile plants. Synchronization of retooling across plants within the auto industry is widespread, so that the fluctuations observed at the plant level have aggregate implications.

This paper provides experimental evidence on forward induction as a refinement criterion. In the basic extensive form, one of the two players chooses to play a battle-of-the-sexes game or to receive a certain payoff. According to forward induction, choosing to play the game is a signal about intended action. Though the presence of the outside option changes play, we find only limited support for the forward-induction hypothesis. The effects of the outside option also reflect the creation of a focal point through the asymmetry created by offering the outside option to one of the two players.