Inefficient Employment Decisions, Entry Costs, and the Cost of Fluctuations

86 Pages Posted: 7 Oct 2009

See all articles by Wouter J. den Haan

Wouter J. den Haan

University of Amsterdam; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Petr Sedlacek

University of Oxford

Date Written: September 2009

Abstract

Fluctuations in firms' revenues reduce firms' viability and are costly from a social welfare point of view even when agents are risk neutral if (i) the decision to continue operating a firm is not efficient at the margin so that fluctuations shorten firms' life expectancy (because they increase the chance revenue levels are such that discontinuation is unavoidable) and (ii) the shortening of the life expectancy reduces entry. Welfare consequences are large, even for moderate fluctuations: Implied estimates for the per period costs of business cycles can easily be equal to several percentage points of GDP. These estimates are based on a direct measurement of cyclical changes in the value added generated by workers that recently were not employed. This extensive margin measure of the cyclical change in output is of independent interest.

Keywords: business cycles, frictions

JEL Classification: E24, E32

Suggested Citation

Den Haan, Wouter J. and Sedlacek, Petr, Inefficient Employment Decisions, Entry Costs, and the Cost of Fluctuations (September 2009). CEPR Discussion Paper No. DP7468, Available at SSRN: https://ssrn.com/abstract=1484501

Wouter J. Den Haan (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.feb.uva.nl/toe/content/people/content/denhaan/pers.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Petr Sedlacek

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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