Rue de la Banque no. 64: Adjustment costs and factor demand: some lessons from corporate real estate

The adjustment costs associated with a change in the quantity of production factors (labour and capital) hinder the optimal allocation of these factors and stifle corporate growth. This issue of Rue de la Banque uses the example of the tax on real estate gains to estimate the impact of these frictions on the behaviour of firms.

At the aggregate level, these frictions hamper the creation of jobs by productive companies and the reallocation of jobs from less productive to more productive firms.


Simon RAY

A great deal of research has been done on how adjustment costs and economic frictions can hold back business growth. In France, for example, there is the research of Garicano et al. (2016, 2017) on the impact of regulation related to firm size. Similarly, the costs associated with adjusting the capital stock of a company have been given special attention (e.g. Cooper and Haltiwanger, 2006). This literature has also demonstrated the very strong negative effect of resource misallocation on aggregate productivity (see Restuccia and Rogerson, 2017 for a review of recent literature).

Following an approach that is complementary to that adopted by the articles proposing indirect measurements of misallocation (e.g. Hsieh and Klenow, 2009), Bergeaud and Ray (2017) focus on the impact of adjustment costs of a specific type of capital: corporate real estate. Specifically, their work leverages the heterogeneity of the level of the tax on real estate gains that owner companies pay when they sell assets that have appreciated. This tax generates significant differences (between companies and over time) in the adjustment cost of real estate assets used in the production process. This makes it possible to identify and measure the impact of a source of friction hindering the optimal adjustment of production factors.

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Rue de la Banque no. 64: Adjustment costs and factor demand: some lessons from corporate real estate
  • Published on 06/15/2018
  • 5 pages
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Updated on: 06/22/2018 15:16