Working Paper: NBER ID: w8849
Authors: Robert E. Hall
Abstract: Adjustment costs determine the dynamics of the response of an industry's output to a shift in demand. Absent any adjustment costs, an increase in demand not accompanied by any change in factor prices raises output, labor, capital, and materials in the same proportion. In the presence of adjustment costs, the elasticity of the response of factors with higher costs is less than one while the elasticity of those without adjustment costs exceeds one. I develop a model of industry dynamics to capture these properties and a related econometric framework to infer adjustment costs from the observed ratios of factor responses to output responses. I find relatively precise evidence of moderate adjustment costs.
Keywords: adjustment costs; industry dynamics; factor inputs; demand shifts
JEL Codes: E3; J23; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adjustment costs (J30) | slower adjustment of labor inputs relative to output changes (J29) |
| Adjustment costs (J30) | slower adjustment of capital inputs relative to output changes (E22) |
| Adjustment costs (J30) | inelastic responses of labor and capital inputs to demand shocks (J49) |
| GDP (E20) | isolate demand effects from other influences (D12) |