Cost Structure and Sticky Costs

Abstract:     
Beginning with Anderson, Banker, and Janakiraman (2003), a rapidly growing literature attributes the short-run asymmetric cost response to activity changes (i.e., sticky costs) as result-ing from short-run managerial choices. We show that past decisions on cost structure, which de-termine the magnitude of costs controllable in the short-term, induce non-stationarity in the elas-ticity of Sales, General and Administrative costs, affecting the interpretation of estimates from the standard specification used in the literature. We develop suggestions for how future research might control for the effects of cost structure. Empirically, we find that cost structure confounds results usually interpreted as reflecting short-run managerial actions. Further, after adjusting for the effects of fixed costs, we find that the results are unstable across alternate sub-samples. Our results provide evidence that long-run cost structure decisions impact our ability to detect short-term cost management decisions.

Number of Pages in PDF File: 33

Keywords: Sticky costs, cost structure, simulations

JEL Classification: M41, L42

working papers series