Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 06/2006: Justifying Functional Forms in Models for Transitions between Discrete States, with Particular Reference to Employment-Unemployment Dynamics

John K. Dagsvik ()
Additional contact information
John K. Dagsvik: Research Department, Statistics Norway and the Ragnar Frisch Centre for, Postal: P.O.B 8131 Dep, NO-0033 Oslo

Abstract: This paper proposes a particular axiomatic approach to motivate the choice of functional forms and distribution of unobservables in continuous time models for discrete panel data analysis. We discuss in particular applications with data on transitions between employment and unemployment. This framework yields a characterization of transition probabilities and duration distributions in terms of structural parameters of the utility function and choice constraints. Moreover, it is discussed how the modeling framework can be extended to allow for involuntary transitions, structural state dependence and random effects.

Keywords: Discrete choice in continuous time; Duration of unemployment/employment; Random utility models; Functional form; Invariance principles

JEL-codes: C23; C25; C41

40 pages, April 25, 2006

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