NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Mix and Scale of Factors with Irreversibility and Fixed Costs of Investment

Andrew B. Abel, Janice C. Eberly

NBER Working Paper No. 6148
Issued in August 1997
NBER Program(s):   EFG

When factors of production can be adjusted costlessly, the mix of factors can be considered separately from their scale. We examine factor choice and utilization when investment is irreversible and subject to a fixed cost, so that the capital stock is a quasi-fixed factor that is adjusted infrequently and by discrete amounts. We derive and analyze analytic approximations for optimal investment behavior, and show how the quasi-fixity of capital eliminates the dichotomy between factor mix and scale. We show that the quasi-fixity of capital can give rise to labor hoarding, even when labor is a purely flexible factor.

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Document Object Identifier (DOI): 10.3386/w6148

Published: Abel, Andrew B. & Eberly, Janice C., 1998. "The mix and scale of factors with irreversibility and fixed costs of investment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 101-135, June.

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