In this paper we develop a switching regression model of investment, in which the probability of a firm facing a high premium on external finance is endogenously determined. This approach allows one to address the potential problem of static and dynamic misclassification encountered where firms are sorted using a criteria chosen a priori. We use U.S. firm level data to analyze the effects of variables that capture each firm's credit worthiness, asymmetric information, and agency problems on the probability of being in the high- or low-premium regime. The role of macroeconomic conditions and monetary policy is also discussed.

The authors extend the Q theory of investment to allow for adjustment costs for labor, under the additional assumption that the firm is a monopolistic competitor in the output market. The issue of nonconstant returns to scale is also discussed. The authors show that the standard Q model is a special case of a more general model involving testable parameter restrictions. Estimates for the U.S. manufacturing sector suggest that the departure from the assumption of perfect competition and lack of adjustment costs for labor receive empirical support in the data.

The objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs. Using Norwegian micro data, we start by documenting the intermittent and lumpy nature of investment rates. We then present two pieces of econometric evidence on these issues. First, we estimate a discrete hazard model to determine the probability of having an episode of high investment, conditional on the length of the interval from the last high-investment episode. Second, we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes. In both cases we investigate the aggregate implications of our results.

Fidel Jaramillo, Fabio Schiantarelli, Alessandro Sembenelli, Are Adjustment Costs for Labor Asymmetric? An Econometric Test on Panel Data for Italy, The Review of Economics and Statistics, Vol. 75, No. 4 (Nov., 1993), pp. 640-648

ServŽn for useful suggestions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. DOES FINANCIAL REFORM RAISE OR REDUCE SAVING? By Oriana Bandiera*, Gerard Caprio Jr.**, Patrick Honohan* * and Fabio Schiantarelli* (*Boston College, **World Bank) The effect of financial liberalization on private saving is theoretically ambiguous, not only because the link between interest rate levels and saving is itself ambiguous, but also because financial liberalization is a multi-dimensional and phased process, sometimes involving reversals. Some dimensions, such as increased household access to consumer credit or housing finance, might also work to reduce private savings rather than increasing them. Furthermore, the long-term effect of liberalization on savings may differ substantially from the impact effect. Using Principal Components, we construct a 25-year time series index of financial

James McIntosh, Fabio Schiantarelli, Jon Breslaw, William Low, Price and Output Adjustment in a Model with Inventories: Econometric Evidence from Categorical Survey Data, The Review of Economics and Statistics, Vol. 75, No. 4 (Nov., 1993), pp. 657-663