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

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  • Chetty, V. K.

    (Boston University)

  • Heckman, James J.

    (University of Chicago)

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.

Suggested Citation

  • Chetty, V. K. & Heckman, James J., 2022. "Internal Adjustment Costs of Firm-Specific Factors and the Neoclassical Theory of the Firm," IZA Discussion Papers 15744, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15744
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    References listed on IDEAS

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    More about this item

    Keywords

    adjustment costs; factor demand; frontier production theory; firm-specific capital;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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