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Adjustment Costs, Uncertainty, and the Level of Activity

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  • Louis Eeckhoudt
  • Nicolas Treich

Abstract

What is the effect of adjustment costs on economic activity? This is an important question that is still debated either at the political or the academic level. We consider a simple model where basically two effects come into play: Adjustment costs decrease current activity but may help maintain future activity. We examine their relative strength, first in a model with uncertain prices and then in a model with demand uncertainty (newsboy problem).

Suggested Citation

  • Louis Eeckhoudt & Nicolas Treich, 2003. "Adjustment Costs, Uncertainty, and the Level of Activity," Southern Economic Journal, John Wiley & Sons, vol. 69(4), pages 990-999, April.
    • Handle: RePEc:wly:soecon:v:69:y:2003:i:4:p:990-999
    DOI: 10.1002/j.2325-8012.2003.tb00545.x
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    1. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
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    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    7. Eeckhoudt, Louis & Treich, Nicolas, 1999. "(In)Flexibility and the level of output: a word of caution," Economics Letters, Elsevier, vol. 63(3), pages 335-339, June.
    8. Bertola, Giuseppe, 1992. "Labor Turnover Costs and Average Labor Demand," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 389-411, October.
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    2. Hau, Arthur, 2010. "Comparative statics of changes in risk on monotonically and partially responsive kinked payoffs," European Journal of Operational Research, Elsevier, vol. 201(1), pages 267-276, February.

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