Interrelated Factor Demand with Nonconvex Adjustment Costs

Letterie, Wilko H.; Nilsen, Øivind Anti; Pfann, Gerard A.

doi:10.2139/ssrn.1550863

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Interrelated Factor Demand with Nonconvex Adjustment Costs

NHH Dept. of Economics Discussion Paper No. 7/2008

17 Pages Posted: 11 Feb 2010

See all articles by Wilko H. Letterie

Wilko H. Letterie

Maastricht School of Business and Economics; Maastricht University

Øivind Anti Nilsen

NHH Norwegian School of Economics - Department of Economics; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Gerard A. Pfann

Maastricht University; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Date Written: April 30, 2008

Abstract

In this paper we develop a model to describe a firm’s demand for two production factors which is subject to the presence of nonconvex adjustment costs. In our model simultaneous adjustment of these two production factors may either increase or decrease the total costs incurred by the firm. The magnitude of this change in total costs ultimately determines the likelihood of joint adjustment. We also show that the importance of interrelation is suppressed by large fixed costs.

Keywords: Factor Demand, Interrelation, Nonconvex Adjustment Costs

JEL Classification: D92, E22, E24, J23, L60

Suggested Citation: Suggested Citation

Letterie, Wilko H. and Nilsen, Oivind Anti and Pfann, Gerard Antonie, Interrelated Factor Demand with Nonconvex Adjustment Costs (April 30, 2008). NHH Dept. of Economics Discussion Paper No. 7/2008, Available at SSRN: https://ssrn.com/abstract=1550863 or http://dx.doi.org/10.2139/ssrn.1550863