Empirical Representation of Firms' Employment Decisions by an (S,S) Rule

41 Pages Posted: 9 Jul 2001

See all articles by Paola Rota

Paola Rota

University of Brescia - Department of Economics

Date Written: April 2001

Abstract

We analyze the conditions under which an (S,s) rule may be derived and compare these with alternative rules. We consider the case of labor demand with fixed adjustment costs. The (S,s) rule implies a specific ordering of choices: downward adjustment, non-adjustment and upward adjustment with the decision of inaction lying crucially in the middle. We may model firms' decisions as an (S,s) rule only if it is possible to characterize unobserved heterogeneity as an exact negative relation between the choice-specific error terms. Assuming that these are normally distributed, the particular ordering of choices implied by the (S,s) rule may be estimated by an ordered probit. We test the (S,s) rule nesting the ordered probit within a multinomial model with correlated error terms. We find that restriction of univariate error distribution is rejected by the data.

Keywords: (S,s) rules, adjustment costs, probit models

JEL Classification: C25, J23

Suggested Citation

Rota, Paola, Empirical Representation of Firms' Employment Decisions by an (S,S) Rule (April 2001). Available at SSRN: https://ssrn.com/abstract=275928 or http://dx.doi.org/10.2139/ssrn.275928

Paola Rota (Contact Author)

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

HOME PAGE: http://www.eco.unibs.it/~segdse/rota/

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