Investment and Employment Dynamics in the Short Run and the Long Run

A firm's stochastic dynamic investment and employment decisions are examined when each of capital and labor has linear adjustment costs of increase and decrease The analysis generates an endogenous ranking of the two factors as more or less flexible; thus the concepts of short and long runs are endogenized. Qualitative characteristics of the dynamics of the two factors are described Adjustment of the more flexible factor can occur on its own, but that of the less flexible factor occurs less frequently and only in conjunction with a complementary adjustment of the more flexible factor.