The Mix and Scale of Factors with Irreversibility and Fixed Costs of Investment

51 Pages Posted: 14 Jun 2000 Last revised: 21 Apr 2021

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Janice C. Eberly

Northwestern University - Kellogg School of Management

Date Written: August 1997

Abstract

When factors of production can be adjusted costlessly, the mix of factors can be considered separately from their scale. We examine factor choice and utilization when investment is irreversible and subject to a fixed cost, so that the capital stock is a quasi-fixed factor that is adjusted infrequently and by discrete amounts. We derive and analyze analytic approximations for optimal investment behavior, and show how the quasi-fixity of capital eliminates the dichotomy between factor mix and scale. We show that the quasi-fixity of capital can give rise to labor hoarding, even when labor is a purely flexible factor.

Suggested Citation

Abel, Andrew B. and Eberly, Janice C., The Mix and Scale of Factors with Irreversibility and Fixed Costs of Investment (August 1997). NBER Working Paper No. w6148, Available at SSRN: https://ssrn.com/abstract=225911

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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215-898-4801 (Phone)
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HOME PAGE: http://finance.wharton.upenn.edu/~abel/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Janice C. Eberly

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1840 (Phone)
847-491-5719 (Fax)

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