Presence Of Adjustment Costs Research Articles

Dumping, adjustment costs and uncertainty

Domestic demand uncertainty in the presence of adjustment costs can cause profit-maximizing firms to sell output abroad at a loss. Firms may dump output at prices below long-run marginal and average productions costs with probability arbitrarily close to one. The model predicts dumping is particularly likely in process industries such as steel. Closed form dumping solutions and interesting comparative statics are obtained. Also, the effect of domestic competition on dumping is examined. I find domestic competition increases total dumping, although a monopolist maximizing output subject to a zero expected profit constraint will dump more than a competitive industry.

Tax Neutrality in the Presence of Adjustment Costs

It is well-known that expensing of capital expenditures will lead to tax neutrality with respect to investment, provided that interest payments are not tax deductible [Brown, 1948]. However, if interest payments are deductible, then allowing firms to deduct economic depreciation will lead to a neutral tax system [Samuelson, 1964]. These neutrality results have been derived in models without costs of adjustment (see also, Hall and Jorgenson [1971], Stiglitz [1973], and King [1974]). However, recent research in investment theory has emphasized the role of costs of adjustment [Lucas, 1967; Gould, 1968; Hayashi, 1982; Abel, 1982a,b]. Using a separable adjustment cost technology in which adjustment costs depend only on the rate of investment, Abel [1982a,b] has shown that the two neutrality propositions above continue to hold. However, using a general nonseparable adjustment cost technology, Hartman [1978] showed that only one of the two neutrality propositions remains valid in the presence of adjustment costs. Expensing continues to lead to neutrality if interest payments are not deductible, but Hartman finds that economic depreciation and interest deductibility do not lead to neutrality in the presence of adjustment costs. In this paper we analyze investment behavior in an adjustment cost framework and construct a neutral tax system with interest deductibility. The neutral tax system allows for economic depreciation but requires some adjustments to taxable income which recognize the fact that capital can implicitly produce net revenue by reducing adjustment costs. Hartman found economic depreciation to be nonneutral because he did not make this necessary adjustment to taxable income and because he calculated economic depreciation incorrectly using the price of uninstalled capital rather than the value of newly installed capital. In the presence of costs of adjustment, true economic depreciation is calculated using the shadow price of installed capital rather than the observable market price of new uninstalled capital. It has been shown by Hayashi [1982] that under appropriate linear homogeneity and price-taking assumptions, the shadow price of capital can

Dynamics of trade liberalization policy

This paper analyzes the dynamics of trade liberalization policies in the presence of adjustment costs. The discussion focuses on modeling the nature of those costs, and the interaction between wages and resource reallocation during the adjustment; also it highlights the role that human capital plays in the adjustment process.

Dynamic Factor Demands under Rational Expectations

This paper presents a dynamic model of the industrial demands for structures, equipment, and blue- and white-collar labor. Our approach is consistent with producers holding rational expectations and optimizing dynamically in the presence of adjustment costs, yet it permits generality of functional form regarding the technology. We represent the technology by atranslog input requirement function that specifies the amount of blue-collar labor (a flexible factor) the firm must hire to produce a level of output given its quantities of three quasi-fixed factors that are subject to adjustment costs: non-production (white-collar) workers, equipment, and structures.A complete description of the production structure is obtained by simultaneously estimating the input requirement function and three stochastic Euler equations.We apply an instrumental variable technique to estimate these equations using aggregate data for U.S. manufacturing. We find that as a fraction of total expenditures, adjustment costs are small in total hut large on the margin,and that they differ considerably across quasi-fixed factors. We also present short- and long-run elasticities of factor demands.

Optimal pollution in the presence of adjustment costs

This paper explores optimal pollution control when pollution is considered a stock and costs of treating pollution are a function both of the level and rate of change of pollution control. It is shown that even if the long run optimum stock of pollution is below the initial level adjustment costs may imply an optimally increasing stock of pollution in the short run. The results obtained are contrasted with those which emerge when adjustment costs are absent and when damages are taken to be a function of the flow of pollution; the appropriate tax rates of polluting discharges are examined.