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Decomposing Duration Dependence in a Stopping Time Model

Author

Listed:
  • Fernando Alvarez
  • Katarína Borovičková
  • Robert Shimer

Abstract

We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two non-employment spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.

Suggested Citation

  • Fernando Alvarez & Katarína Borovičková & Robert Shimer, 2024. "Decomposing Duration Dependence in a Stopping Time Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(6), pages 3151-3189.
  • Handle: RePEc:oup:restud:v:91:y:2024:i:6:p:3151-3189.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad109
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