MICRO/THEORY: Comparative statics with adjustment costs and the le Chatelier principle; Dr. Ludvig SINANDER (Oxford University)

Abstract

We develop a theory of monotone comparative statics in the presence of adjustment costs. We show that comparative-statics conclusions may be drawn under the usual ordinal complementarity assumptions on the objective function, assuming almost nothing about costs: the only requirement is that non-adjustment be costless. We use this insight to provide a general treatment of the le Chatelier principle based on adjustment costs. We extend these results to a fully dynamic, forward-looking model of adjustment over time: given only minimal structure on costs, optimal adjustment follows a monotone path. We apply our results to models of investment and of sticky prices.

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