Template-Type: ReDIF-Paper 1.0 Author-Name: Robert G. King Author-X-Name-First: Robert Author-X-Name-Last: King Author-Email: rking@bu.edu Author-Workplace-Name: Department of Economics, Boston University Author-Name: Julia K. Thomas Author-X-Name-First: Julia Author-X-Name-Last: Thomas Author-Email: jkt@econ.umn.edu Author-Workplace-Name: Department of Economics, University of Minnesota Title: Partial Adjustment without Apology Abstract: Many kinds of economic behavior appear to be governed by discrete and occasional individual choices. Despite this, econometric partial adjustment models perform relatively well at the aggregate level. Analyzing the classic employment adjustment problem, we show how discrete and occasional microeconomic adjustment is well described by a new form of partial adjustment model that aggregates the actions of a large number of heterogeneous producers facing fixed costs of factor adjustment. In the market equilibrium of this model, employment responses to aggregate disturbances include changes both in a target employment selected by establishments and in the measure of establishments actively adjusting to this target. Yet the model retains a partial adjustment flavor in its aggregate responses. Previous research involving discrete factor adjustment has been conducted almost exclusively under the assumption of exogenous prices, given the complications presented by nontrivial heterogeneity in production. We demonstrate how such complications can be limited, allowing both general equilibrium analysis and the convenience of linear solution methods. We also show how our framework is easily generalized to accommodate persistent idiosyncratic shocks. This generalization allows both greater consistency with the microeconomic dynamics of factor adjustment, as well as application to a much broader set of questions involving discrete individual choices, within a tractable equilibrium model. Length: 39 pages Creation-Date: 2005-02 Revision-Date: Publication-Status: Forthcoming in International Economic Review File-URL: http://people.bu.edu/rking/TEMPWP/WP2005/WP2005-001.htm File-Format: Application/pdf File-Function: Number: WP2005-001 Classification-JEL: E2, E3 Keywords: dynamic factor demand, generalized partial adjustment, discrete individual Handle: RePEc:bos:macppr:WP2005-001