What Is a Loss Adjustment Expense?

Adjustment costs generally refer to costs incurred by economic entities when decision variables change.

Adjustment cost

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Adjustment costs generally refer to costs incurred by economic entities when decision variables change.

Adjustment costs generally refer to costs incurred by economic entities when decision variables change. 'The reason why they appear in the optimization model of economic individuals is to provide a basis for deriving the optimal rate of change of decision variables that are different from the optimal level, and to adjust the selection variables to change exogenous variables. Lag establishes a theoretical explanation.

The development of the concept of adjustment cost provides a basis for the capital investment theory of a single firm. As Hawsmore (CHaaveirna. 1961) clearly points out, the neoclassical drunken firm theory proposes a need for capital as a stock, not a limited need for investment. This in particular means that the theory of rhetoric cannot reasonably explain the important predictions described below, why changes in real interest rates can cause opposite movements when investing in plant equipment at the scale of a single manufacturer.

If adjusted costs do have important economic implications in investment theory, it is necessary to clarify the nature of these costs. In the relevant literature, the cost of adjustment has been identified in several different types. These will help to distinguish which costs are caused by the internal activities of the manufacturers and which are caused by market forces outside the manufacturers.

Internal adjustment cost refers to the output abandoned when the manufacturer shifts resourcescapital and laborfrom production activities to investment activities. It mainly includes planned costs and installation costs. In the formulation of investment plans, resources are used in research, development and management activities. Similarly, new capital equipment also consumes resources in "fixing" new capital goods, restructuring production lines and training workers to use new equipment. The output lost from these activities constitutes the cost of adjustment. Moreover, the greater the investment rate, the greater the associated costs.