A dynamic profit function with adjustment costs for outputs

It is well known that there are adjustment costs associated with many input factors, which delays firms response to changes in relative prices. Although adjustment costs are implicitly acknowledged when a cost rather than profit function is used, little attention has been given to adjustment costs for outputs. However, in many cases there will also be adjustment costs associated with changes in the product mix for multioutput firms. In this paper we formulate a firm’s optimization problem in a profit maximizing set up that allows adjustment costs for all netputs from which it follows that adjustment cost for some factors affect the adjustment of both inputs and outputs. We also show that one can test whether a factor is quasi-fixed or fully fixed.      

Asymmetric adjustment costs in simple general equilibrium models

This paper demonstrates that the introduction of asymmetric adjustment costs in a simple general equilibrium framework establishes a meaningful link between factor price determination and output determination, breaking the analytically convenient dichotomy of the Heckscher-Ohlin-Samuelson model. The possibility of trade between seemingly similar countries that differ in their adjustment technologies is visited.     

Capital adjustment cost and inconsistency in income‐based dynamic panel models with fixed effects

After the seminal work of Nickell (1981), a vast literature demonstrates the inconsistency of ‘conditional convergence’ estimator in income‐based dynamic panel models with fixed effects when the time horizon (T) is short but the sample of countries (N) is large. Less attention is given to the economic root of inconsistency of the fixed effects estimator when T is also large. Using a variant of the Ramsey growth model with long‐run adjustment cost of capital, we demonstrate that the fixed effects estimator of such models could be inconsistent when T is large. This inconsistency arises because of the long‐run adjustment cost of capital which gives rise to a negative moving average coefficient in the error term. Income convergence will be thus overestimated. We theoretically characterize the order of this inconsistency. Our Monte Carlo simulation demonstrates that the size of the bias is substantial and it is greater in economies with higher capital adjustment costs. We show that the use of instrumental variables that take into account the presence of the negative moving average term in the error will overcome this bias.     

Forecasting US recessions with various risk factors and dynamic probit models

This paper extends probit recession forecasting models by incorporating various recession risk factors and using the advanced dynamic probit modeling approaches. The proposed risk factors include financial market expectations of a gloomy economic outlook, credit or liquidity risks in the general economy, the risks of negative wealth effects resulting from the bursting of asset price bubbles, and signs of deteriorating macroeconomic fundamentals. The model specifications include three different dynamic probit models and the standard static model. The out-of-sample analysis suggests that the four probit models with the proposed risk factors can generate more accurate forecasts for the duration of recessions than the conventional static models with only yield spread and equity price index as the predictors. Among the four probit models, the dynamic and dynamic autoregressive probit models outperform the static and autoregressive models in terms of predicting the recession duration. With respect to forecasting the business cycle turning points, the static probit model is as good as the dynamic probit models by being able to flag an early warning signal of a recession.     

The macroeconomic effects of infrequent information with adjustment costs

We extend the macroeconomic literature on Ss -type rules by introducing infrequent information in a kinked adjustment-cost model. We first show that optimal individual decision rules are both state and time dependent. We then develop an aggregation framework to study the macroeconomic implications of such optimal individual decision rules. In our model, a vast number of agents act together, and more so when uncertainty is large. The average effect of an aggregate shock is inversely related to its size and to aggregate uncertainty. These results contrast with those obtained with full information adjustment cost models. JEL Classification: E0,E1,E2,E3
Les effets macroéconomiques de l'information infréquente quand il y a des coûts d'ajustement. Les auteurs étendent la portée de la littérature spécialisée sur les règles de type Ss en proposant des postulats d'information infréquente et de fonction de coûts d'ajustement pliée. On montre que les règles de décision optimales des individus dépendent à la fois de l'état de l'environnement et du moment. On développe alors un cadre d'agrégation pour étudier les impacts macroéconomiques de ces règles optimales de décision. Dans ce modèle, un grand nombre d'agents agissent de concert, et optimales ce d'autant plus que l'incertitude s'accroît. L'effet moyen d'un choc au niveau global est inversement reliéà son importance et au niveau d'incertitude agrégée. Ces résultats contredisent ceux qu'on obtient dans des modèles de coûts d'ajustement avec pleine information.     

Labor adjustment costs and complex eigenvalues

Aggregate variables display both persistence and damped oscillations in response to temporary external shocks. The standard real business cycles (RBC) model cannot explain these patterns, because its stable eigenvalues are positive and real. We demonstrate that this model with labor adjustment costs can yield complex eigenvalues. However, numerical experiments suggest that the model cannot display distinguishable damped oscillations of aggregate variables.     

Testing for structural change in the dynamic adjustment model with autoregressive errors

The dynamic CUSUM test for structural change proposed by Kr?mer, Ploberger and Alt (1988) is investigated when the errors are serially correlated in a linear dynamic model. We show that the dynamic CUSUM test can be modified to allow for serial correlation in the disturbance using the same procedure as in Kao and Ross (1995), and that the modified dynamic CUSUM test retains its asymptotic significance levels. Monte Carlo results suggest that the empirical size of the dynamic CUSUM test is highly distorted while the empirical size of the modified dynamic CUSUM test is fairly robust to the change on the degree of autocorrelation. We also find that the power of the modified test essentially depends on the angle between the mean regressors and the structural shift. First version received: April 1997/Final version received: January 1998     

A dynamic Stackelberg model with production-adjustment costs

We investigate the (dynamic) stability of a stackelberg oligopoly model of a market of a homogeneous good, with output competition, one Stackelberg leader and a number of identical followers. We assume that each firm incurs quadratic production-adjustment costs if it changes its output. We present a simple necessary and sufficient condition for stability of the model. Using the condition, we compare the stability of this model with the stability of two related Cournot models in which all firms present are followers. It turns out that the Stackelberg model is more stable than these two Cournot models.     

Scale economies with regard to price adjustment costs and the speed of price adjustment in Australian manufacturing

This paper aims to examine the impact of firm size, industry concentration and the length of production on industry speed of price adjustment. To motivate the paper, an industry pricing model in error correction form is derived from firm pricing behaviour. As a new development, firms are assumed to have price adjustment costs that are a function of their size. The empirical model is estimated using two‐digit Australian manufacturing industry data for the period 1994:3 to 2006:1. The results suggest that the industry speed of price adjustment is positively related to firm size and negatively related to industry concentration and the production lag. Implied values for industry speeds of price adjustment are generally small when compared to other country industry studies. However, the industry average median lag of 7.1 quarters indicates a slightly faster speed of price adjustment than the estimate for the Australian consumer price index by Dwyer and Leong (2001 Dwyer, J. and Leong, K. 2001. Changes in the determination of inflation in Australia 1–44. Reserve Bank of Australia Research Discussion Paper 2001‐02 [Google Scholar]).     

Testing for adjustment costs and regime shifts in BRENT crude futures market

This paper, using a threshold vector error-correction (TVECM) model, examines whether BRENT crude spot and futures oil prices are cointegrated. By employing this methodology we are able to evaluate the degree and dynamics of transaction costs resulting from various market imperfections. TVECM model is applied on daily spot and futures oil prices covering the period 1990-2009. The hypothesis we test is to what extent BRENT crude is indeed an integrated oil market in terms of threshold effects and adjustment costs. Our findings support that market follows a gradual integration path. We find that BRENT crude spot and futures are cointegrated, though two regimes are clearly identified. This implies that a threshold exists and it is indeed significant. Adjustment costs in the error correction are present, and they are valid at the typical regime that is the dominant, and as a result should not be ignored.     

Optimal tax reform in the presence of adjustment costs

The optimal implementation of an efficiency-enhancing capital taxation reform is examined when the government is concerned about arbitrary reform-induced redistributions and investment causes firms to incur adjustment costs. Theoretical results indicate that immediate partial enactment of reform is optimal with concave adjustment costs, while with convex adjustment costs, the optimal reform implementation policy is either (i) immediate partial enactment with sufficiently low adjustment costs, (ii) phased-in partial enactment with intermediate adjustment costs, or (iii) postponed partial enactment with sufficiently high adjustment costs. Numerical results suggest that, relative to the optimal one-step implementation policy, little is gained by phasing-in reform.     

Skilled–unskilled wage inequality and offshore outsourcing with asymmetric adjustment costs

We present a model that can capture the effects of offshore outsourcing on the wedge between the wages of skilled and unskilled workers when costs of adjustment are asymmetric. We identify conditions under which offshore outsourcing activities widen the skilled–unskilled wage inequality in the presence of asymmetric adjustment costs. We show how a higher cost of adjustment in the import-competing sector can magnify the offshore outsourcing induced gap between the wages of the skilled and unskilled workers. We also demonstrate the sensitivity of the effects of offshore outsourcing, on the skilled–unskilled wage gap, to asymmetries in the costs of adjustment.     

An estimation of Feldstein's dynamic adjustment model for physicians' services with Austrian data

Zusammenfassung Eine anhaltende Überschußnachfrage nach Arzt-Diensten (Feldstein, 1970: Permanent Excess Demand Hypothesis) läßt sich im Bereich der Primärnachfrage als Folge sogenannten moralischen Hasardierens der Patienten und im Bereich der Sekundärnachfrage als Folge einer Nachfrageinduktion durch einkommensmaximierende Mediziner erklären. Da die Überschußnachfrage-Hypothese eine Überversorgung mit Arzt-Diensten auf Grund einer umfassenden Krankenversicherung impliziert, wurde sie in der gesundheitspolitischen Diskussion heftig bestritten. Feldstein (1970) bestätigte für die Vereinigten Staaten die Existenz einer anhaltenden Überschußnachfrage. Unter geringfügigen Abänderungen liefert das Feldstein'sche Modell für Österreich für die private (Zusatz-)Krankenversicherung inhaltlich das gleiche Ergebnis. Um die Genannte Hypothese auch für die öffentliche Krankenversicherung, die in Österreich weitaus bedeutsamer ist als die private, zu untersuchen, wurde eine andere Methode gewählt. Statt eines ökonometrischen Modells wurden zwei Intensitätsresiduen aus trivial-arithmetischen Beziehungen zwischen Wachstumsraten gebildet. Sowohl die Intensivierung der Behandlung der einzelnen Patienten wie die Erhöhung der Zehandlungen pro Arzt im Zeitraum von 1964 bis 1980 spricht für eine Bestätigung der obigen Hypothese.

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For helpful comments I am indepted to W. Schönbäck and two unknown referees.     

The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.     

Modelling economic hysteresis losses caused by sunk adjustment costs

Transition from one economic equilibrium to another as a consequence of shocks is often associated with sunk adjustment costs. Firm-specific sunk market entry investments (or sunk market exit costs) in case of a reaction to price shocks are an example. These adjustment costs lead to a dynamic supply pattern similar to hysteresis. In analogy to “hysteresis losses” in ferromagnetism, the authors explicitly model dynamic adjustment losses in the course of market entry and exit cycles. They start from the micro level of a single firm and use explicit aggregation tools from hysteresis theory in mathematics and physics to calculate dynamic losses. The authors show that strong market fluctuations generate disproportionately large hysteresis losses for producers. This could give a reason for the implementation of stabilizing measures and policies to prevent strong (price) variations or, alternatively, to reduce the sunk entry and exit costs.     

Asymmetric adjustment costs and the dynamics of housing supply

This paper examines aggregate dynamics on the supply side of the housing market. The representative firm's intertemporal profit maximisation problem is considered under asymmetric adjustment costs. The hypothesis of asymmetric adjustment costs is also examined empirically using Irish data. Several interesting insights into the dynamics of housing supply are uncovered. These include support for the proposition that the adjustment costs of expanding housing output are greater than those associated with a contraction, evidence of threshold points beyond which adjustment starts to speed up and also the existence of a continuum of equilibria between these thresholds where no adjustment occurs at all.     

Use of a diagnosis-based risk adjustment model to estimate costs of indigent care in a community at Medicaid reimbursement rates

Objectives: This study used a diagnosis-based risk adjustment model to estimate the annual costs of uninsured patients in Austin, Texas, and describe the prevalence and costs of their chronic conditions. The data were supplied by the Indigent Care Collaboration, a partnership of local safety-net hospitals and clinics.

Methods: This study used the Diagnostic Cost Groups prospective Medicaid All-Encounters model, which uses diagnoses, age and gender to assign relative risk scores to patients. The relative risk scores were multiplied by the per capita Texas Medicaid expenditure to obtain estimated annual costs. Chronic diseases were described in terms of prevalence and total estimated annual cost.

Results: A total of 471,194 encounters were recorded for 163,729 patients meeting the study inclusion criteria between the 1st March 2004 and the 28th February 2005. The mean estimated patient yearly cost was US $1,307, and the total estimated yearly population cost was $228,909,529. The most common chronic conditions included hypertension, diabetes, depression, substance abuse, pregnancy, asthma, chronic obstructive pulmonary disease and congestive heart failure.

Conclusions: This study demonstrates how the unknown costs associated with caring for indigent uninsured patients in a community can be estimated at Medicaid reimbursement rates using the Diagnostic Cost Group model on aggregated patient encounter data.