Interaction effects in the adjustment cost function of firms

Alexander Amundsen

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: The literature has found that interaction effects exist between capital and labour in the adjustment cost function of firms, but there is no consensus on whether these costs are positive or negative. Using a dynamic firm structural model where capital is broken up into buildings and machinery & equipment, this paper finds that part of this ambiguity can be directly tied to capital heterogeneity. Firms are found to enjoy negative costs between labour and machinery & equipment, and between labour and buildings, while they suffer from positive costs between buildings and machinery & equipment. When compared to a model with only capital and labour, the interaction cost is found to be positive, highlighting how neglecting capital heterogeneity can lead to a spurious result on its sign. I evaluate the importance of these interactions by simulating three shocks: an increase in uncertainty, an increase in the interest rate, and an increase in the wage rate. I uncover large differences in the steady state dynamics of each input that are directly attributable to the interaction effects in the adjustment cost function.

Keywords: Adjustment costs; Capital heterogeneity; Investment dynamics; Labour (search for similar items in EconPapers)
JEL-codes: C61 C63 D22 D24 D25 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922002731
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002731

DOI: 10.1016/j.jedc.2022.104570

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().