Working Paper: CEPR ID: DP1371
Authors: Daniel S. Hamermesh; Gerard A. Pfann
Abstract: This study discusses the nature of adjustment costs, which underpin the dynamic theory of input demand. We examine the implications of the conventional assumption that they are quadratic-symmetric. A recent rapidly-growing literature based on microeconomic data shows that this assumption is inferior to many alternatives. We demonstrate the importance of this new knowledge for predicting macroeconomic fluctuations in employment and investment. We indicate its relevance for constructing general equilibrium simulation models, drawing inferences about the likely impacts of labour market and investment policies, and analysing firms? dynamic behaviour in factor markets.
Keywords: individual; dynamic; firm behaviour
JEL Codes: D21; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adjustment costs (J30) | firms' slow responses to changes in input demand (D21) |
| adjustment costs (J30) | firms' long-run demand for inputs (D21) |
| structure of adjustment costs (J30) | firms' factor demand (J23) |
| adjustment costs (J30) | macroeconomic outcomes (E66) |
| knowledge of adjustment costs (D89) | predicting long-term effects of economic policies on factor demand (J23) |