Internal adjustment costs of firm-specific factors and the neoclassical theory of the firm

V. K. Chetty () and James J. Heckman ()
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V. K. Chetty: Boston University Chobanian and Avedisian School of Medicine
James J. Heckman: University of Chicago

A chapter in Advances in Applied Econometrics, 2024, pp 239-258 from Springer

Abstract: Abstract This paper considers the predictions for factor demand of a two-sector vertically integrated model of firms producing output using firm-specific capital along with a second sector producing firm-specific capital that adapts raw capital purchased in the market. Analysts rarely observe each sector separately. Aggregating over both sectors produces short-run and long-run factor demand functions that appear to be perverse, but when disaggregated obey standard neoclassical properties. For example, a firm’s response to a minimum wage could appear to violate the law of demand because it hires labor to install machines to replace the more expensive labor in the final output sector. Adjustment costs create the appearance of static inefficiency in the presence of dynamic efficiency.

Keywords: Adjustment costs; Factor demand; Frontier production theory; Firm-specific capital (search for similar items in EconPapers)
JEL-codes: D21 D22 D25 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/978-3-031-48385-1_10

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