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

V.K. Chetty, James J. Heckman

This paper considers the consequences of a two-sector vertically-integrated model of firms producing output using firm-specific capital with a second sector producing firm-specific capital by adapting 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. Adjustment costs create the appearance of static inefficiency in the presence of dynamic efficiency.

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Year of publication:	November 2022
Authors:	Chetty, V. Karuppan ; Heckman, James J.
Publisher:	Bonn, Germany : IZA - Institute of Labor Economics
Subject:	adjustment costs \| factor demand \| frontier production theory \| firm-specific capital \| Theorie der Unternehmung \| Theory of the firm \| Anpassungskosten \| Adjustment costs \| Produktionstheorie \| Production theory \| Neoklassische Theorie \| Neoclassical economics \| Produktionskosten \| Production costs \| Produktionsfaktor \| Production factor