This paper uses a standard neoclassical model of the firm to disentangle the contribution of the structure of adjustment costs from the
stochastic process driving the fluctuations in employment at the establishment level. Our data displays an extreme degree of rigidity in
that employment levels are largely constant throughout our sample. This can be due to the fact that establishments face large shocks but also
large adjustment costs, or alternatively that they incur no adjustment costs but that shocks are negligible. The policy implications of these
two alternatives are very different. We find that rigidity is due to adjustment costs and not to the shock process. We further find that
these costs reduce the value of the firm as much as 5%.
Presented by:
Joao M. Ejarque, Department of Economics, University of Essex
Date & time:
February 1, 2006 1:00 pm - February 1, 2006 12:00 am
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