MICROECONOMIC ADJUSTMENT HAZARDS AND AGGREGATE DYNAMICS

The basic premise of this paper is that understanding aggregate dynami cs requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive. We provide a gen eral characterization of lumpy behavior at the microeconomic level in terms of an adjustment-hazard function, which relates the probability that a unit adjusts to the deviation of its state variable from its mo ving target. We characterize rich, cross-sectionally dependent aggrega te dynamics generated by nonconstant hazards. We present an example ba sed on U. S. manufacturing employment and job flows, and find that inc reasing-hazard models outperform constant-hazard-partial-adjustment mo dels in describing aggregate employment dynamics.