Investment and hiring with fixed and asymmetric adjustment costs.

Summary A firm operating in a deterministic, continuous-time world uses a simple Cobb-Douglas technology with diminishing returns and faces complex factor adjustment costs. On the one hand, a proportional hiring cost applies to the irreversible labor factor. On the other hand, investing requires paying a fixed but proportional cost to the labor force present in the firm. The firm then determines its hiring and investment policy that maximizes the present value of its cash flows. The combination of fixed and variable costs implies a non-trivial cycle of factor adjustment in which there is a continuous hiring episode, followed by a hiring freeze and then a simultaneous peak in investment and hiring. The paper proposes a numerical evaluation of the effects of the size of the fixed cost on the life cycle of the firm.