Factor Specificity and Real Rigidities

Carlos Carvalho and Fernanda Nechio

Review of Economic Dynamics, 2016, vol. 22, 208-222

Abstract: We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide or firm-specific factor markets. Sectoral factor specificity generates within-sector strategic substitutability and tends to induce across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on parameterization and the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity may serve as a reasonable short-run approximation, whereas economy-wide markets are likely a better description of how factors of production are allocated in the longer run. (Copyright: Elsevier)

Keywords: Factor specificity; Multisector model; Heterogeneity; Monetary non-neutrality (search for similar items in EconPapers)
JEL-codes: E12 E22 J6 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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DOI: 10.1016/j.red.2016.08.002

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