Comparative statics with adjustment costs and the Le Chatelier principle

Eddie Dekel, John Quah and Ludvig Sinander

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Abstract: We develop a theory of monotone comparative statics for models with adjustment costs. We show that comparative-statics conclusions may be drawn under the usual ordinal complementarity assumptions on the objective function, assuming very little about costs: only a mild monotonicity condition is required. We use this insight to prove a general Le Chatelier principle: under the ordinal complementarity assumptions, if short-run adjustment is subject to a monotone cost, then the long-run response to a shock is greater than the short-run response. We extend these results to a fully dynamic model of adjustment over time: the Le Chatelier principle remains valid, and under slightly stronger assumptions, optimal adjustment follows a monotone path. We apply our results to models of saving, production, pricing, labor supply and investment.

Date: 2022-06, Revised 2024-10
New Economics Papers: this item is included in nep-mic
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