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Estimating interrelated nonconvex adjustment costs

Asphjell, Magne Krogstad
Master thesis
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URI
http://hdl.handle.net/11250/168261
Date
2009
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  • Master Thesis [3749]
Abstract
Adjustment costs associated with firms’ acquirement or disposal of factors of production

can make the individual firm unresponsive to changes in their environment. This is the

reason why costs of adjustments is assumed to be one of the reasons why we observe firm

and plant level adjustment patterns as unevenly distributed over time. Understanding

what characterizes such costs is important for understanding firm level behaviour, but can

also be important to understand dynamics of both capital and labor demand at macro

level. Because several studies on adjustment costs and factor demand indicate correlation

in the demand for production factors, this thesis aims to present a way to simultaneously

estimate adjustment cost functions of two factors, including both convex and nonconvex

components. Joint estimation also allows for possible existence of interrelations in the

adjustment cost function. A likelihood function for estimation by Maximum Likelihood is

derived, and results after estimation on simulated panel data is presented. The text shows

how a likelihood function can be written to estimate adjustment cost parameters that can

be traced directly back to a theoretical framework for adjustment costs and factor

demand. It is also shown that under certain conditions, the procedure inhabits weaknesses

regarding identification of model parameters, which should be improved for increased

robustness.

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