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Adjustment costs, uncertainty, and the level of activity

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  • EECKHOUDT, Louis
  • TREICH, Nicolas

Abstract

What is the effect of adjustment costs on economic activity? This is an important question that is still debated either at the political or the academic level. We consider a simple model where basically two effects come into play: Adjustment costs decrease current activity but may help maintain future activity. We examine their relative strength, first in a model with uncertain prices and then in a model with demand uncertainty (newsboy problem).
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  • EECKHOUDT, Louis & TREICH, Nicolas, 2003. "Adjustment costs, uncertainty, and the level of activity," LIDAM Reprints CORE 1618, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1618
    Note: In : Southern Economic Journal, 69(4), 990-999, 2003
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    1. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
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    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. Eeckhoudt, Louis & Treich, Nicolas, 1999. "(In)Flexibility and the level of output: a word of caution," Economics Letters, Elsevier, vol. 63(3), pages 335-339, June.
    7. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-689, September.
    8. Siebert, Horst, 1997. "Labor market rigidities and unemployment in Europe," Kiel Working Papers 787, Kiel Institute for the World Economy (IfW Kiel).
    9. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
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    Cited by:

    1. Hau, Arthur, 2010. "Comparative statics of changes in risk on monotonically and partially responsive kinked payoffs," European Journal of Operational Research, Elsevier, vol. 201(1), pages 267-276, February.

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