Internal Adjustment Costs of Firm-Specific Factors and the Neoclassical Theory of the Firm

34 Pages Posted: 29 Nov 2022

See all articles by V. K. Chetty

V. K. Chetty

Boston University

James J. Heckman

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); American Bar Foundation; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: November 28, 2022

Abstract

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.

Keywords: adjustment costs, factor demand, frontier production theory, firm-specific capital

JEL Classification: D21,E13,L11

Suggested Citation

Chetty, V. K. and Heckman, James J., Internal Adjustment Costs of Firm-Specific Factors and the Neoclassical Theory of the Firm (November 28, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-156, Available at SSRN: https://ssrn.com/abstract=4287591 or http://dx.doi.org/10.2139/ssrn.4287591

V. K. Chetty

Boston University

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James J. Heckman (Contact Author)

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