Decomposing Duration Dependence in a Stopping Time Model

Fernando Alvarez, Katarína Borovičková and Robert Shimer

The Review of Economic Studies, 2024, vol. 91, issue 6, 3151-3189

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.

Keywords: Unemployment; Duration models; Job finding rate; Switching costs; Unobserved heterogeneity; Inverse Gaussian distribution; Set identification (search for similar items in EconPapers)
Date: 2024
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