Optimal investment policy with fixed adjustment costs and complete irreversibility

We develop and solve analytically an investment model with fixed adjust-ment costs and complete irreversibility that reproduces observed investment dynamics at the micro-level. We impose a minimal set of restrictions on technology and uncertainty. Most of the results duplicate or generalize earlier findings that have been established either by simulations or under contrefactual assumptions.

Optimal Investment with Fixed Adjustment Costs and Complete Irreversibility

ED EP

Estimating Job Creation and Destruction Costs with Heterogeneous Firms

ED EP

Estimating Labor Market Rigidities with Heterogeneous Firms,” unpublished

A large literature in rm dynamics estimates models of labor adjustment costs. Most studies assume that wages are set competitively, an important assumption since wage exibility reduces the incentive to adjust the workforce. I relax this assumption and introduce wage bargaining with multiple workers. A reduced-form empirical decomposition suggests that transitory shocks to sales have a strong e ect on wages, but that permanent shocks have a very small e ect on wages. I propose and estimate a structural model of rm behavior that can account for these dynamics: rms adjust relatively less the workforce in response to temporary shocks, leading to higher wages since the labor productivity goes up. The model is estimated using French panel data, through a new indirect inference procedure which allows for heterogeneity in rm parameters. The model ts the data well. Only a small amount of adjustment costs is needed to reproduce observed job reallocation and inaction rates. Permanent shocks are the most important source of output uctuations. Ignoring measurement errors or wage exibility lead to erroneous conclusions. The model with heterogeneous coe cients greatly improves the t of the observed dispersion of labor productivity compared to a model with homogeneous coe cients