We present a dynamic framework for the interaction between borrowing (liquidity) constraints and deviationsof actual hours from desired hours, both measured by discrete-valued indicators, and estimate it as a systemof dynamic binary and ordered probit models with panel data from the Panel Study of Income Dynamics.We analyze a household’s propensity to be liquidity constrained by means of a dynamic binary probitmodel. We analyze qualitative aspects of the conditions of employment, namely whether the household headis involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed, bymeans of a dynamic ordered probit model. We focus on the possible interaction between the two typesof constraints. We estimate these models jointly using maximum simulated likelihood, where we allow forindividual random effects along with an autoregressive process for the general error term in each equation.A novel feature of our method is that it allows for the random effects to be correlated with regressors in atime-invariant fashion. Our results provide strong support for the basic theory of constrained behavior andthe interaction between liquidity constraints and exogenous constraints on labor supply.[...]
