INVESTMENT AND EMPLOYMENT DYNAMICS IN THE SHORT RUN AND THE LONG RUN

A firm's stochastic dynamic investment and employment decisionsare examined when each of capital and labor has linear adjustmentcosts of increase and decrease The analysis generates an endogenousranking of the two factors as more or less flexible; thus theconcepts of short and long runs are endogenized. Qualitativecharacteristics of the dynamics of the two factors are describedAdjustment of the more flexible factor can occur on its own,but that of the less flexible factor occurs less frequentlyand only in conjunction with a complementary adjustment of themore flexible factor.