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A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper

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Author Info

  • Christian Bayer

    (Universität Dortmund)

Abstract

Recently, there has been a lively debate between Cooper and Willis (2001,2002,2003a, 2003b) and Caballero and Engel (2004) about the apropriateness of the so-called 'gap approach' to labor adjustment. Cooper and Willis claim that the gap approach is unable to identify non- convex adjustment costs because of a measurement error under the alternative hypothesis of convex costs. This comment assesses the validity of Cooper and Willis' claim by providing evidence from a number of Monte-Carlo experiments. In contrast to Cooper and Willis findings from single simulations, the experiments reveal no tendency to falsely reject the convex-cost hypothesis if one uses the correct one-sided test for non-convexities. In fact, the parameter estimates are typically biased against the hypothesis of non-convex costs. Consequently, there is no tendency to falsely reject although the estimates show substantial excess dispersion as a result of a spurious regression problem.

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File URL: http://128.118.178.162/eps/mac/papers/0408/0408010.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0408010.

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Length: 9 pages
Date of creation: 17 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0408010

Note: Type of Document - pdf; pages: 9
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Web page: http://128.118.178.162

Related research

Keywords: Employment Adjustment; Non-Convex Adjustment Costs; Monte- Carlo Experiments;

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References

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  1. Ricardo J. Caballero & Eduardo Engel & John Haltiwanger, 1996. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," Documentos de Trabajo 6, Centro de Economía Aplicada, Universidad de Chile.
  2. Russell Cooper & Jonathan Willis, 2002. "The cost of labor adjustment : inferences from the gap," Research Working Paper RWP 02-11, Federal Reserve Bank of Kansas City.
  3. Russell W. Cooper & Jonathan L. Willis, 2001. "The Economics of Labor Adjustment: Mind the Gap," NBER Working Papers 8527, National Bureau of Economic Research, Inc.
  4. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1994. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," NBER Working Papers 4887, National Bureau of Economic Research, Inc.
  5. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2004. "Three Strikes and You.re Out: Reply to Cooper and Willis," Working Papers 883, Economic Growth Center, Yale University.
  6. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  7. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Adjustment Hazards and Aggregate Dynamics," NBER Working Papers 4090, National Bureau of Economic Research, Inc.
  8. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
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Cited by:
  1. Christian Bayer, 2004. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Macroeconomics 0411018, EconWPA.

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