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Adjustment Costs and Factor Demand: New Evidence From Firms’ Real Estate

Author

Listed:
  • A. Bergeaud
  • S.Ray

Abstract

Adjustment costs impair the optimal allocation of production factor across firms. In this paper, we use the cost associated with corporate relocation to explore the effect of the adjustment costs of the premises size on factor demand. We rely on the tax on realized capital gains on real estate asset, which entails varying real estate adjustment costs across firms, to empirically study the effect of these frictions on firms' behaviour. We develop a general equilibrium model, with heterogeneous firms, that sheds light on the implication of the level of the fixed costs associated with the adjustment of real estate on the change in firms' labor demand following productivity shocks. This model predicts that employment growth of firms facing positive productivity shocks shrinks with the level of the frictions. Confronting these results using French firm-level data over the period 1994-2013, we find that higher adjustment costs constrain relocation and reduce job creation of the most dynamic firms. The highlighted frictions have noticeable macroeconomic effects.

Suggested Citation

  • A. Bergeaud & S.Ray, 2017. "Adjustment Costs and Factor Demand: New Evidence From Firms’ Real Estate," Working papers 641, Banque de France.
  • Handle: RePEc:bfr:banfra:641
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    Cited by:

    1. Philippe Aghion, Antonin Bergeaud, Timo Boppart & Simon Bunel, 2018. "Firm Dynamics and Growth Measurement in France," Working papers 676, Banque de France.
    2. repec:bfr:rueban:2018:64 is not listed on IDEAS

    More about this item

    Keywords

    Corporate real estate; Firms' relocation; Adjustment costs; Misallocation of resources.;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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