Adjustment Cost Function Research Articles

Estimating Asymmetric Fuel Price Responses in Croatia

Abstract Background According to many studies, the transmission of oil prices to retail fuel prices is asymmetric. Fuel prices react faster if oil prices rise and more slowly if oil prices fall. Different standard econometric procedures lead to different results. The Linex approach, which is based on formulating the non-linear adjustment cost function, reflects the theory. It uses the generalised method of moments to estimate the reaction functions, which demands many observations. Objectives The paper investigates the price asymmetry in the Croatian retail fuel market using standard approaches and the Linex approach. Methods/Approach The simple and dynamic asymmetry models, error correction models, threshold autoregressive co-integration, and the Linex approach are used to verify the hypothesis of asymmetric reactions of gasoline and diesel prices in Croatia. Results The results using the standard methods are mixed, while the Linex approach indicates price asymmetry, the size of which is measured with the average price bias. The results correspond to other studies worldwide. Conclusions The authors' preferred Linex approach detects price asymmetries, even with large data samples with frequent changes in trends and volatilities. According to the approach, the question is not whether prices are formed asymmetrically but the size of the asymmetry.

Interaction effects in the adjustment cost function of firms

The literature has found that interaction effects exist between capital and labour in the adjustment cost function of firms, but there is no consensus on whether these costs are positive or negative. Using a dynamic firm structural model where capital is broken up into buildings and machinery & equipment, this paper finds that part of this ambiguity can be directly tied to capital heterogeneity. Firms are found to enjoy negative costs between labour and machinery & equipment, and between labour and buildings, while they suffer from positive costs between buildings and machinery & equipment. When compared to a model with only capital and labour, the interaction cost is found to be positive, highlighting how neglecting capital heterogeneity can lead to a spurious result on its sign. I evaluate the importance of these interactions by simulating three shocks: an increase in uncertainty, an increase in the interest rate, and an increase in the wage rate. I uncover large differences in the steady state dynamics of each input that are directly attributable to the interaction effects in the adjustment cost function.

Asymmetric Reactions of Retail Gasoline Prices on the Changes in Crude Oil Prices in Chosen US Cities

Many empirical studies state that retail gasoline and diesel prices react more quickly when the crude oil price rises rather than decreases. In the paper, we confirm these asymmetric reactions of retail fuel prices in selected cities in the United States of America. We use the adjustment cost function in the linear-exponential form to derive nonlinear retail gasoline and diesel reaction functions. The correspondent model is estimated with the system's generalised method of moments. The model allows us to compute average one-gallon gasoline and diesel price biases from the increase in oil by one dollar per barrel caused by the given asymmetric reactions. The average biases differ from city to city; their values are between 0.02 cents in Los Angeles and 0.44 cents in Cleveland.

Estimating empirical marginal adjustment cost function: a power series approach

Estimating empirical marginal adjustment cost function: a power series approach

Estimating Empirical Marginal Adjustment Cost Function - A Power Series Approach

Estimating Empirical Marginal Adjustment Cost Function - A Power Series Approach

Investment and CEO compensation under limited commitment

We extend the neoclassical investment model (Hayashi, 1982) to allow for limited commitment on compensation contracts. We consider three types of limited commitment: (i) managers cannot commit to compensation contracts that provide lower continuation utility than their outside options; (ii) shareholders cannot commit to negative net present value (NPV) projects; (iii) both the managers and the shareholders cannot commit. We characterize the optimal contract under general convex adjustment cost functions and provide examples for which closed-form solutions can be obtained. We show that, as in the data, small firms invest more, grow faster, and have a higher Tobin׳s Q than large firms under the optimal contract. In addition, the pattern of the dependence of chief executive officer (CEO) compensation on past performance implied by our model is also consistent with empirical evidence.

Employment and Hours Over the Business Cycle in a Model with Search Frictions

This paper studies a labor market search-matching model with multi-worker firms to investigate how firms utilize the extensive and intensive margins over the business cycle. The earnings function derived from the Stole-Zwiebel bargaining acts as an adjustment cost function for employment and hours. We calibrate the model to match the Japanese labor market, in which the intensive margin accounts for 79% of the variations in total working hours. The model replicates the observed cyclical behavior of hours of work, but fails to generate employment volatility of realistic magnitude. Additional penalties for longer hours of work do not resolve this issue. Wage rigidity and persistent shocks are promising lines of further investigations.

MICRO-DOPPLER EXTRACTION AND ANALYSIS OF THE BALLISTIC MISSILE USING RDA BASED ON THE REAL FLIGHT SCENARIO

Micro-Doppler (MD) caused by the motion of the ballistic missile can contribute to successful recognition of the ballistic missile. Considering the real observation scenario. This paper proposes a method to derive the MD image of the ballistic missile by applying the range-Doppler algorithm (RDA) based on the real ∞ight scenario and analyzes the factor for the real-time MD imaging. Simulation results using the ∞ight trajectory constructed using the real target parameter demonstrate that we need a new cost function for phase adjustment and a new method for range alignment. In addition, matched-flltering needs to be performed in the baseband, and a su-cient PRF is required to prevent discontinuity of the MD image. Dechirping of MD and flltering of the random movement are also needed for a clear MD image. Among the various weapons used in the modern battlefleld, the ballistic missile in∞icts the biggest threat due to its high maneuvering speed and low radar cross section (RCS), and thus defending against the ballistic missile is a major issue. Recently, a theory has been developed to explain micro-Doppler (MD) efiect caused by the micro motion of the target and applied for radar target recognition purpose (1,2). In the case of the ballistic missile, three motion components | spinning, conning and nutation | cause MD, and they can be utilized for target recognition in combination with the motion parameter (1,3,4). However, very little research has been reported on its application to the real ∞ight scenario and the factor that needs to be considered for the real-time MD imaging. In this paper, considering the real observation scenario by a radar, we propose a method to extract an MD signature of a ballistic missile engaged in the real ∞ight scenario by applying the range-Doppler algorithm (RDA), which is generally used to form the inverse synthetic aperture radar (ISAR) image (5{8), and analyze various factors for the real-time high quality MD image. For this purpose, we constructed the ∞ight trajectory by using the real motion parameters of a 500km range scud missile conducted a translation motion compensation (TMC). Then, the time-varying MD image was formed by applying the time-frequency transform (TFT). Various simulations were performed by using the obtained MD image to study the requirement for the real-time MD imaging. Simulation results obtained by using a target composed of the point scatter demonstrate that the MD signature can be successfully constructed by using the range-Doppler algorithm. However, a new method for TMC is required for real-time high-quality MD imaging. In addition, matched-flltering (MF) in the baseband is required to form a focused image, and a su-cient PRF is needed to remove discontinuity. The re∞ected signal needs to be dechirped to reduce the required PRF, and a fllter needs to be designed to remove the random movement.

Investment Shocks: A Source of Fluctuations in a Small Open Economy

This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Investment and CEO Compensation Under Limited Commitment

We extend the neoclassical investment model Hayashi (1982) to allow for limited commitment on compensation contracts. We consider three types of limited commitment: i) managers cannot commit to compensation contracts that provide lower continuation utility than their outside options; ii) shareholders cannot commit to negative net present value projects; iii) limited commitment on both the manager and the shareholder sides. We characterize the optimal contract under general convex adjustment cost functions and provide examples where closed form solutions can be obtained. We show that consistent with empirical evidence, small firms invest more, grow faster, have higher Tobin's Q, and are less likely to pay dividends than large firms do under the optimal contract.

Hotspot-aware fast source and mask optimization

Source mask optimization (SMO) is a useful technique for printing the integrated circuit (IC) on a wafer with increasingly smaller feature size. However, complex SMO algorithms generally lead to undesirably long runtime resulting from an optimization of largely identical regions over the whole mask pattern. In this work, a weighted SMO scheme incorporating both an awareness of the hotspots and robustness against process variations is proposed. We show how optimal solutions are reached with fewer iterations by applying various degrees of correction in the corresponding regions. The proposed method includes identifying the hotspots and combining a weight matrix to the cost function for adjustment and control. Simulation results are compared with the mask optimization (under a fixed source) and conventional SMO to illustrate the performance improvement in terms of pattern fidelity, convergence rate and process window size.

The effects of environmental policies on the abatement investment decisions of a green firm

Abstract This paper focuses on environmental policies aimed at rising investment in pollution abatement capital. We assume that ecological uncertainty, i.e., uncertainty over the dynamics of pollution, affects firm investment decisions. Capital irreversibility is not postulated but endogenized using a quadratic adjustment cost function. Using this framework, we study the effects of environmental policies considering taxes on polluting inputs and subsidies to reduce the cost of abatement capital. Environmental policies promoted to enforce abatement capital may generate the unexpected result of reducing the abatement investment rate.

Relative energy price and investment by European firms

A dynamic model of investment is estimated with data on non-financial firms in 15 European countries across 25 industries over 1991–2006. A rise in real energy price reduces the degree of persistence in the investment adjustment cost function. Panel results suggest that in manufacturing a 1% rise in real energy price reduces investment by a country's firms by 1.9% relative to that by firms in other countries with a smaller effect for non-manufacturing firms. The negative effect of a higher relative price of energy on firm-level investment is significantly less marked the larger the firm. Results imply that stabilizing the relative price of energy would steady firm investment with greater gains in stability at smaller and medium sized firms. Results are robust to consideration of country business cycle effect and firm leverage. Estimation of investment is based on the Euler equation approach with over 21,000 observations. Individual country regressions imply that a rise in the relative price of energy price has a statistically significant negative effect on firm-level investment in 14 out of 15 countries. To avoid dynamic panel bias estimation is by generalized method of moments with instrumental variables.

Pollution Externality and Pollution Abatement Capital: A Closed-Form Solution for the Investment Rate of a Green Firm with Uncertainty and Irreversibility

This paper focuses on environmental policies aimed at rising investment in pollution abatement capital. Capital irreversibility is not postulated but endogenized using a quadratic adjustment cost function. We assume that ecological uncertainty, i.e. uncertainty over the dynamics of pollution, affects firm investment decisions. Closed-form solutions for the investment and value of a green firm are derived, showing that irreversibility reduces its fundamental value. The effects of environmental policies are investigated considering taxes on polluting inputs and subsidies to reduce the cost of abatement capital. Environmental policies promoted to enforce abatement capital may generate the unexpected result of reducing the abatement investment rate.

The role of investment efficiency in the industry life cycle

This article studies a dynamic model of an industry life cycle based on increasing returns in the cost of growth whereby large firms can grow more easily. When there are strong increasing returns in the adjustment cost function, the model exhibits multiple rest points, and firms do not necessarily all end up in the same state. The model generates typical life cycle stages including a shakeout. The likelihood of survival is positively correlated with the entering size, an implication that fits empirical findings that exiting firms are small not only just prior to exit but also at the time of entry. The model also explains newer findings on the evolution of moments, an increase in the skewness and the spread of firm-size distribution before the shakeout and a decline in these with the start of the shakeout. Copyright 2010 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Investment rigidity and policy measures

This paper assesses the impacts of decoupled government transfers on production decisions of a sample of Kansas farms. Our empirical analysis is based on a reduced-form application of the dual model of investment under uncertainty developed by Sckokai, which is extended to a consideration of irregularities in the capital stock adjustment cost function. To do so we adopt the threshold regression methods proposed by Hansen. The econometric results support the existence of three regimes characterised by different economic behaviour. Our analysis suggests that in a dynamic setting that allows for irregularities in the capital adjustment cost function, decoupled transfers can have a powerful influence on production decisions. The dynamics of the stock of capital cause this influence to grow over time

Business Cycle and Asset Prices: A Computable General Equilibrium Analysis with Agency Costs and Habit Formation

For the purpose of explaining both business cycles and asset returns, we examine a real business cycle (RBC) model with habit-augmented preferences and endogenous costs of adjusting the capital stock. Following the agency-cost model of Carlstrom and Fuerst (1997), capital adjustment costs are affected by the level of entrepreneur's net worth such that an increase in net worth (following a positive productivity shock) lowers agency costs associated with external financing, and hence makes it easier to expand the capital stock. Along with the restricted labor supply, the model resolves the asset pricing puzzles of the consumption-based model in the sense that the implied stochastic discount factor (or pricing kernel) reaches the Hansen-Jagannathan (1991) volatility bound. Further, this improvement in the asset pricing dimension is achieved without reducing its business cycle performance such as output and consumption volatility. This is in a sharp contrast to the standard RBC model with the reduced-form adjustment cost technology where sufficiently low supply elasticity of capital (or persistently high capital adjustment costs) is required to generate the equity premium at the expense of low output volatility. Here, the capital supply is highly elastic under the plausible calibrations of the structural parameters affecting endogenous capital adjustment costs. The slugghish behavior of net worth, as a shifter of the capital supply curve, is the key mechanism by which capital adjustment is delayed, hampering consumption smoothing desired by households with habit persistence preferences. The agency-costs model reveals that a small curvature in the capital adjustment cost function, viewed as crucial for understanding the fluctuations in Tobin's q, can be also consistent with both the historical equity premium and the key business cycle facts.

Disentangling Investment Returns and Stock Returns: The Importance of Time-to-Build

I provide new evidence on the failure of the Q-theory. The Q-theory implies the state-by-state equivalence of stock and investment returns|a important implication of many asset pricing models. Using aggregate US data, I nd there exists a realistic pa- rameterization of the aggregate production and adjustment cost function such that em- pirical investment returns have rst and second moments similar to historical US stock returns. Investment and stock returns are negatively correlated, however, contradicting the Q-theory. This paper also proposes a rational explanation for this nding. A general equilibrium model with production, in which investment projects involve time-to-build, can rationalize these ndings. The model is also able to explain the negative correlation of investment growth and stock returns at the aggregate level|an observation that has been interpreted as evidence for irrational markets since it cannot be reconciled with the Q-theory of investment.

Capital adjustment patterns on Dutch pig farms

This paper develops a generalised adjustment cost framework that explicitly accounts for zero investments on Dutch pig farms. A farm-specific flexible adjustment cost function is used to account for differences in adjustment costs between farms. Using the Generalised Method of Moments the Euler equations for investment in buildings and machinery are estimated on a panel of specialised Dutch pig farms. It is found that adjustment costs are an important determinant in investment for buildings but not for machinery.

Farm‐specific Adjustment Costs in Dutch Pig Farming

This paper develops a dynamic model of investment under rational expectations, assuming farm‐specific production technologies and adjustment cost structures. The model distinguishes regimes of negative, zero and positive investments and maintains that it is optimal for a farmer not to invest for a range of shadow prices, depending on thresholds for positive and negative investments. The model is applied to a rotating sample of Dutch pig farms over the period 1980–1996. Farm‐specific parameters of the adjustment cost function and production technology are obtained using Generalised Maximum Entropy estimation. Cluster analysis using the farm‐specific adjustment cost parameters indicates that five groups of farms with distinct adjustment cost structures can be identified. A tobit regression analysis is used to explain the impact of different socio‐economic factors on the size of the threshold between positive and negative investments.