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Unemployment and Liquidity Constraints

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In this paper we propose a modelling approach for labor supply and consumption decisions that is firmly grounded within a utility maximizing framework and allows for a role of such institutional constraints as limited access to borrowing and involuntary unemployment. We report estimations for a system of dynamic probit models with data from the Panel Study of Income Dynamics. These estimations test broad predictions of the theoretical model. One of our models describes a household's propensity to be liquidity constrained in a given period. The second is a dynamic ordered probit model for a labor constraint indicator describing qualitative aspects of the conditions of employment, that is whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed. These models are estimated separately as well as jointly. Our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply.

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  • Vassilis A. Hajivassiliou & Yannis M. Ioannides, 1995. "Unemployment and Liquidity Constraints," Cowles Foundation Discussion Papers 1090, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1090
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    Cited by:

    1. Chen, Songnian & Zhou, Xianbo, 2011. "Semiparametric estimation of a bivariate Tobit model," Journal of Econometrics, Elsevier, vol. 165(2), pages 266-274.
    2. Hajivassiliou, Vassilis & Savignac, Frédérique, 2007. "Financing constraints and a firm's decision and ability to innovate: establishing direct and reverse effects," LSE Research Online Documents on Economics 4774, London School of Economics and Political Science, LSE Library.
    3. Antonio Afonso & Pedro Gomes & Philipp Rother, 2009. "Ordered response models for sovereign debt ratings," Applied Economics Letters, Taylor & Francis Journals, pages 769-773.
    4. Bianconi, Marcelo & Tan, Liang, 2010. "Cross-listing premium in the US and the UK destination," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 244-259, April.
    5. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, pages 77-86.
    6. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1486-1508, June.
    7. Manuela Deidda, 2014. "Precautionary saving under liquidity constraints: evidence from Italy," Empirical Economics, Springer, pages 329-360.
    8. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    9. Sònia Muñoz, 2006. "Habit Formation and Persistence in Individual Asset Portfolio Holdings; The Case of Italy," IMF Working Papers 06/29, International Monetary Fund.
    10. Jean-Marie Dufour & Joachim Wilde, 2013. "Weak Identification in Probit Models with Endogenous Covariates," Working Papers 95, Institute of Empirical Economic Research, Osnabrueck University, revised 28 Feb 2013.
    11. Isabel Busom & Beatriz Corchuelo & Ester Martínez-Ros, 2017. "Participation inertia in R&D tax incentive and subsidy programs," Small Business Economics, Springer, vol. 48(1), pages 153-177, January.
    12. Laura Leete & Neil Bania, 2010. "The effect of income shocks on food insufficiency," Review of Economics of the Household, Springer, vol. 8(4), pages 505-526, December.
    13. Tomura, Hajime, 2013. "Heterogeneous beliefs and housing-market boom-bust cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 735-755.

    More about this item

    Keywords

    Intertemporal optimization; quantity constraints; liquidity constraints; unemployment; dynamic probit models; simulation estimation;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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