Adjustment Cost Model Research Articles

Exploring the minimum cost conflict mediation path to a desired resolution within the inverse graph model framework

The existing inverse graph model for conflict resolution (GMCR) research primarily concentrates on identifying the required preferences of decisions makers (DMs) such that a desired state is an equilibrium. However, the process of transitioning from the current state to the desired equilibrium is not explored. In this paper, we propose a minimum adjustment cost model taking account of preference adjustment costs to identify the required preferences for a desired state to be an equilibrium. Subsequently, we introduce the concept of transition costs for the first time to quantify expenses involved in guiding a DM transition from one state to another and develop a minimum cost conflict mediation path model. This model aims to identify the most efficient path that minimizes the cost of transitioning from the current state to the desired equilibrium. Moreover, to accommodate the consideration of multiple desired equilibria, we extend the minimum cost conflict mediation path model to analyze and determine the optimal path for transitioning from the current state to one of the identified desired equilibria with the overall minimum cost. Furthermore, to address uncertainty surrounding transition costs, we formulate a probability maximizing conflict mediation path model that considers a limited budget available for the mediation process. Finally, a real-world dispute, the fracking conflict in the province of New Brunswick, Canada, is utilized to demonstrate the application of the proposed models.

Multi-attribute decision-making based on data mining under a dynamic hybrid trust network

The issues arising from the evolution of big data and network environment have rendered the relationship among experts to no longer be an independent multi-attribute group decision-making process. In response, a PROMETHEE multi-attribute decision-making method based on data mining under dynamic hybrid trust network is proposed. This method incorporates evaluation similarity based on degree centrality and expert trust values based on K-hop centrality in the social network to determine the experts’ weights. Furthermore, because the expert weight is somewhat affected by the attribute weight, the public-level attribute weight is obtained through data crawling and TF-IDF technology. The comprehensive attribute weight is acquired through a combination of expert-level attribute weights. Additionally, establishing a minimum adjustment cost model enables experts to follow a dynamic consensus reaching process in a composed hybrid trust network. Finally, to express the evaluation information more accurately in a complex linguistic environment, the probabilistic linguistic PROMETHEE method is introduced and applied to the site selection evaluation of charging and swapping stations. This highlights the feasibility and effectiveness of the proposed method through the comparison of decision-making methods and parameter sensitivity analysis.

A Synthetic Approach for Datacenter Power Consumption Regulation towards Specific Targets in Smart Grid Environment

With the large-scale grid connection of renewable energy sources, the frequency stability problem of the power system has become increasingly prominent. At the same time, the development of cloud computing and its applications has attracted people’s attention to the high energy consumption characteristics of datacenters. Therefore, it was proposed to use the characteristics of the high power consumption and high flexibility of datacenters to respond to the demand response signal of the smart grid to maintain the stability of the power system. Specifically, this paper establishes a synthetic model that integrates multiple methods to precisely control and regulate the power consumption of the datacenter while minimizing the total adjustment cost. First, according to the overall characteristics of the datacenter, the power consumption models of servers and cooling systems were established. Secondly, by controlling the temperature, different kinds of energy storage devices, load characteristics and server characteristics, the working process of various regulation methods and the corresponding adjustment cost models were obtained. Then, the cost and penalty of each power regulation method were incorporated. Finally, the proposed dynamic synthetic approach was used to achieve the goal of accurately adjusting the power consumption of the datacenter with least adjustment cost. Through comparative analysis of evaluation experiment results, it can be observed that the proposed approach can better regulate the power consumption of the datacenter with lower adjustment cost than other alternative methods.

Breaking the UIP: A Model-Equivalence Result

Breaking the uncovered interest rate parity (UIP) condition is essential to accounting for the empirical behavior of exchange rates, and is a prerequisite for theoretical analysis of sterilized foreign exchange interventions. Gabaix and Maggiori (2015) account for some of the long-standing empirical exchange rate puzzles by introducing financial intermediaries that are willing to absorb international saving imbalances for a premium, thereby deviating from the UIP. In another important contribution, Fanelli and Straub (2019) lay down the principles for foreign exchange interventions. In their model, regulatory exposure limits and participation cost in the international financial markets drive a wedge in the UIP. This paper demonstrates that, to a first order approximation, these models are equivalent to a reduced-form portfolio adjustment cost model, as in Schmitt-Grohe and Uribe (2003). Therefore, to the extent that one is only concerned with first-order dynamics and second moments, there is no gain from adopting the rich microstructure of either models -- a simple portfolio adjustment cost is just as good.

CLIMATE UNCERTAINTY AND AGRICULTURAL SOIL CONSERVATION INVESTMENT DECISIONS

This paper conceptualizes the soil conservation decisions of farmers when confronted with climate uncertainty. Using a dynamic stochastic optimization model with uncertainty captured by climate variability, soil conservation investment is assessed within the framework of an investment adjustment cost model. The theoretical results reveal that the effects of an uncertain future climate on the optimal path of soil conservation investment depend on how sensitive production is to climate and that input and output prices have level effects on the optimal path of investment. An empirical application to data from Texas shows that depending on the sensitivity of production to climate and the severity of the risk; climate induced uncertainty may have a negative effect, a threshold (U-shaped) effect, or no effect at all on soil conservation investment.

Optimal plans and timing under additive transformations to rewards

The nature and role of additive transformations to rewards are elucidated for a general class of deterministic, nonautonomous, optimal control problems with many state and control variables. Conditions relating to the optimal choice of initial and terminal times and initial and terminal values of state variables are identified such that additive transformations affect optimal plans. General comparative static results are derived and the framework is extended to cover two common classes of stochastic control problems. Three applications are presented: the canonical adjustment cost model of a firm, a stochastic extension of an irreversible pollution accumulation problem with regime-switching, and an extension of a lifecycle model of retirement in which an agent’s retirement wealth evolves stochastically.

Rationally Inattentive Seller: Sales and Discrete Pricing

Prices tend to remain constant for a period of time and then jump. In the literature, this “rigidity” is usually interpreted to reflect a cost of adjusting prices. This article shows that price rigidity can alternatively reflect optimal price setting when there are no adjustment costs, namely, if the seller is rationally inattentive. The model generates non-trivial pricing patterns that are consistent with the data and that are hard to explain with the traditional adjustment-cost model. In particular, prices are adjusted frequently but move back and forth between a few given values, hazard functions are downward sloping, and responses to persistent shocks are sluggish. These results are obtained in a model that implements rational inattention without simplifying assumptions on the functional forms of the processed signals.

The adjustment-cost model of the firm: Duality and productive efficiency

We present the theoretical foundation for an adjustment cost technology that supports the intertemporal production decision making behavior using the directional distance function. Dynamic input efficiency measures are developed that can separate out the impact of variable and dynamic factors inefficiency levels. An approach to implement this theory in a nonparametric fashion is developed and applied to an unbalanced panel of Dutch glasshouse firms. The application finds overuse of all variable inputs and overcapitalization of installations, the overall dynamic efficiency gain of 16% remains possible, with allocative inefficiencies indicating underinvestment in structures and installations. A comparison of static and dynamic efficiency measures finds that the static overall cost inefficiency is overestimated with technical inefficiency being overstated and allocative inefficiency being understated.

An adjustment cost model of social mobility

We analyze herein the effects of the human capital adjustment cost on social mobility. Such an adjustment cost is modeled as a rising marginal cost schedule for augmenting human capital. We use a general human capital technology, which disentangles the adjustment cost from the depreciation cost of the human capital. Missing credit markets prevent individuals from equalizing the initial differences in the human capital. We find that a higher adjustment cost for human capital acquisition slows down the social mobility and results in a persistent inequality across generations. On the other hand, a higher rate of human capital depreciation could increase mobility via a positive effect on new investment. The quantitative analysis of our model suggests that the human capital adjustment cost is nontrivial to account for the observed persistence of inequality and social mobility. In addition, we find that the government redistribution policy could account for the large observed variation in estimates of social mobility.

Imperfect Competition in Bank Retail Markets, Deposit and Loan Rate Dynamics, and Incomplete Pass Through

This paper examines determinants of pass through from the market interest rate to bank retail deposit and loan rates. A dynamic adjustment cost model with imperfect competition implies that these rates depend on own lagged values and on lagged, current, and expected future values of the security rate. Greater competition in retail markets reduces the impact of lagged and expected rates on current retail rates while raising the effect of the current security rate, yielding greater pass through. These results have important implications for both the specifications used in empirical work and biases introduced into estimates of pass‐through effects.

Comparison of misspecified calibrated models: The minimum distance approach

This paper proposes several testing procedures for comparison of misspecified calibrated models. The proposed tests are of the Vuong-type (Vuong, 1989; Rivers and Vuong, 2002). In our framework, the econometrician selects values for model’s parameters in order to match some characteristics of data with those implied by the theoretical model. We assume that all competing models are misspecified, and suggest a test for the null hypothesis that they provide equivalent fit to data characteristics, against the alternative that one of the models is a better approximation. We consider both nested and non-nested cases. We also relax the dependence of models’ ranking on the choice of a weight matrix by suggesting averaged and sup-norm procedures. The methods are illustrated by comparing the cash-in-advance and portfolio adjustment cost models in their ability to match the impulse responses of output and inflation to money growth shocks.

Comparison of Misspecified Calibrated Models: The Minimum Distance Approach

This paper proposes several testing procedures for comparison of misspecified calibrated models. The proposed tests are of the Vuong-type (Vuong, 1989; Rivers and Vuong, 2002). In our framework, the econometrician selects values for model's parameters in order to match some characteristics of data with those implied by the theoretical model. We assume that all competing models are misspecified, and suggest a test for the null hypothesis that they provide equivalent fit to data characteristics, against the alternative that one of the models is a better approximation. We consider both nested and non-nested cases. We also relax the dependence of models' ranking on the choice of a weight matrix by suggesting averaged and sup-norm procedures. The methods are illustrated by comparing the cash-in-advance and portfolio adjustment cost models in their ability to match the impulse responses of output and inflation to money growth shocks.

Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model*

In this paper we test the existence of forward-looking behaviour in a multivariate model for alcohol and tobacco consumption. The theoretical framework, based on a dynamic adjustment cost model with forward-looking behaviour, is enhanced to include the intertemporal interactions between the two goods. The analysis of the within-period preferences completes the intertemporal model, allowing to evaluate the static substitutability/complementarity relationships. The empirical strategy consists in a two-step estimation procedure. In a first stage, we obtain the parameters of the demand system, while in a second stage Euler equations are estimated. Results, based on a cohort data set constructed from a series of cross-sections of the Italian Household Budget Survey, reveal a significant complementarity relationship between alcohol and tobacco. Estimation of the Euler equations does not lead to rejection of the hypothesis of intertemporal dependence, providing evidence for a forward-looking behaviour in alcohol and tobacco consumption. Moreover, we find significant intertemporal interactions that support the adjustment cost setting in a multivariate model with rational expectations.

A Comment on the Economics of Labor Adjustment: Mind the Gap: Evidence from a Monte Carlo Experiment

This comment addresses a point raised in Russell Cooper and Jonathan Willis (2003, 2004), which discusses whether the “gap approach” is appropriate to describe the adjustment of production factors. They show that this approach to labor adjustment as applied in Ricardo J. Caballero, Eduardo Engel, and John C. Haltiwanger (1997) and Caballero and Engel (1993) can falsely generate evidence in favor of nonconvex adjustment costs, even if costs are quadratic. Simulating a dynamic model of firm-level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data, they identify two factors producing this spurious evidence: approximating dynamic adjustment targets by static ones, and estimating the static targets themselves. This comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs. We show that the numerical approximation of the productivity process is pivotal for Cooper and Willis's finding. With more precise approximations of the productivity process, it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones. (JEL E24, J3)

Does the liquidity effect guarantee a positive term premium?

This paper examines the liquidity effect and the term structure in two versions of the limited participation model—an imperfect information model and an adjustment cost model. With a discrete-state solution approach, I find a striking contrast: while the imperfect information model successfully generates the liquidity effect and the positive term premium seen in the data; the adjustment cost model replicates only the liquidity effect. This is because the adjustment cost that drives the liquidity effect in the adjustment cost model also creates an adjustment cost effect, which leads to a negative term premium.

Bayesian Estimation of an Asymmetric Employment Adjustment Model

In this paper, we analyze the dynamic labor demand structure of large Japanese firms. We propose a new dynamic model which explicitly considers the asymmetric behavior of the firms between decreasing and increasing regimes. The model modifies the ordinary partial adjustment and switching cost models. The model is a Tobit-type model; that is, the employment strategies and desired levels of labor are determined by latent variables. We estimate the model using the data augmentation algorithm, which is a Bayesian simulation method. We apply the model to the panel data constructed from financial reports of large Japanese manufacturing firms. When asymmetric adjustment costs are included in the model, we find that: i) the hiring cost does not become lower even if lay-offs and dismissals are easier, and ii) employment strategies differ among the industrial sectors even if their cost structures are similar.

The testable implications of a capital‐accumulating, price‐taking, vertically integrated, non‐renewable resource extracting model of the firm

AbstractAn exhaustive set of refutable implications of a price‐taking, capital‐accumulating, vertically integrated Hotelling model is derived by way of intertemporal duality theory. The curvature properties of the model come in the form of a semidefinite matrix, and an upper bound to the rank of the matrix is established. The theorems, for the first time, permit one to determine if a given sample of data is fully consistent with the generalized Hotelling model, as well as the recovery of theoretically valid estimates of the shadow values of non‐renewable resource and capital stocks. The testable implications of the model go beyond those of the archetypal Hotelling and adjustment cost models, and as such, display several properties not present in the prototype models. Copyright © 2008 John Wiley & Sons, Ltd.

Investment options and the business cycle

This paper extends [R. Mehra, E.C. Prescott, Recursive competitive equilibrium: The case of homogeneous households, Econometrica 48 (1980) 1365–1380] to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an ‘option.’ When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent from the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice.

Testing of seasonal integration and cointegration with fractionally integrated techniques: An application to the Danish labour demand

This article examines seasonal quarterly data of several labour demand variables in Denmark by means of fractional integration techniques. We use the same dataset as in Engsted and Haldrup [Engsted, T., Haldrup, N., 1994, The linear quadratic adjustment cost model and the demand for labour. Journal of Applied Econometrics 9, 145–159] and Fanelli [Fanelli, L., 2002. A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables. Journal of Economic Dynamics and Control 26, 117–139]. In these two papers they examine the demand for labour using classic cointegration techniques at the long run or zero frequency, based on error correction models. In this paper, we argue that some of the variables used in these models might be misspecified due to the seasonal structure underlying the processes. In fact, a seasonal fractional model may be a more adequate specification for some of the series. A small empirical application based on seasonal fractional cointegration is also carried out at the end of the article.

Expectations and regime robustness in price formation: evidence from vector autoregressive models and recursive methods

The forward-looking linear quadratic adjustment cost (LQAC) model has received attention when modelling prices. Empirical evidence supporting the model seems, however, ambiguous. We find that the LQAC-model is severely at odds with price data for Norwegian machinery exports also when the pure forward-looking rule is augmented by additional lags of the targeted variable. A conditional equilibrium correction (EqCM) model explains the export price behaviour more accurately. Our findings may rule out a large class of expectations based models and not just the particular LQAC-model in the formation of export prices. We also demonstrate that the EqCM-model performs well post-sample despite that monetary policy in Norway has changed from a fixed to a floating exchange rate regime following a recent introduction of inflation targeting. This regime robustness shows that the Lucas critique lacks force empirically in our case.