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Adjustment Costs

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Abstract

This article surveys the use of adjustment frictions in macroeconomic research, exploring the consequences of convex and non-convex adjustment costs for firm- level decisions and the dynamics of macroeconomic aggregates. The mechanics of these frictions are illustrated using several prominent examples including the partial adjustment model of employment, the q-theoretic investment model, and lumpy adjustment models of investment and employment. We also review the (S,s) inventory model, where stock accumulation is explained as the result of fixed delivery costs, and briefly discuss (S,s) decision rules arising from piecewise-linear costs in the context of capital irreversibility and firing taxes.

This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume

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  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    Aubhik Khan & Julia K. Thomas

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  1. Aubhik Khan
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  2. Julia K. Thomas
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    Khan, A., Thomas, J.K. (2008). Adjustment Costs. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_422-2

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    • DOI: https://doi.org/10.1057/978-1-349-95121-5_422-2

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    • Online ISBN: 978-1-349-95121-5

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    1. Latest

      Adjustment Costs
      Published:
      24 April 2017

      DOI: https://doi.org/10.1057/978-1-349-95121-5_422-2

    2. Original

      Adjustment Costs
      Published:
      22 November 2016

      DOI: https://doi.org/10.1057/978-1-349-95121-5_422-1

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