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

Author

Listed:
  • V. K. Chetty

    (Boston University Chobanian and Avedisian School of Medicine)

  • James J. Heckman

    (University of Chicago)

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.

Suggested Citation

  • V. K. Chetty & James J. Heckman, 2024. "Internal adjustment costs of firm-specific factors and the neoclassical theory of the firm," Advanced Studies in Theoretical and Applied Econometrics,, Springer.
    • Handle: RePEc:spr:adschp:978-3-031-48385-1_10
    DOI: 10.1007/978-3-031-48385-1_10
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    More about this item

    Keywords

    Adjustment costs; Factor demand; Frontier production theory; Firm-specific capital;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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