Unformatted text preview: maintain committed resources and bear the costs of operating with unutilized capacity or
reduce committed resources and incur the adjustment costs of retrenching
and, if volume is restored, replacing committed resources at a later date.
This suggests that stickiness would be stronger in circumstances where the
assessed probability that a demand decline is permanent is lower or where
the costs of adjusting committed resources are higher. We estimate an expanded version of the sticky costs model and ﬁnd empirical support for
these economic arguments. 2. Stickiness of SG&A Costs
The traditional model of cost behavior relates costs to different levels
of activity without considering how managerial intervention affects the
resource-adjustment process. Managers make discrete changes to committed resources because some costs are lumpy; that is, committed resources
cannot be added or subtracted in sufﬁciently small increments or quickly
enough to match resource changes to small changes in demand. By itself,
cost lumpiness may lead to excess or insufﬁcient capacity but it does not
lead to sticky costs. Sticky costs occur because there are asymmetric frictions in making resource adjustments—forces acting to restrain or slow the
downward adjustment process more than the upward adjustment process.
Firms must incur adjustment costs to remove committed resources and
to replace those resources if demand is restored. Adjustment costs include
such things as severance pay when employees are dismissed and search and
training costs when new employees are hired. In addition to out-of-pocket
costs, adjustment costs include organizational costs such as loss of morale
among remaining employees when associates are terminated or erosion of
human capital when work teams are disrupted.
When demand increases, managers increase committed resources to the
extent necessary to accommodate additional sales. When volume falls, however, some committed resources will not be utilized unless managers make
the deliberate decision to remove them. Because demand is stochastic, managers must evaluate the likelihood that a drop in demand is temporary when
deciding whether to adjust committed resources downward. Stickiness of
SG&A costs occurs if managers decide to retain unutilized resources rather
than incur adjustment costs when volume declines.
Managers’ decisions to maintain unutilized resources may also be caused
by personal considerations and result in a form of agency costs. Agency M. C. ANDERSON, R. D. BANKER, AND S. N. JANAKIRAMAN 50 costs are costs incurred by the ﬁrm because self-interested managers make
decisions that maximize their personal utility but are not optimal from
the perspective of the ﬁrm’s stockholders (Jensen and Meckling ).
Managers may retain unutilized resources to avoid personal consequences
of retrenchment, such as loss of status when a division is downsized or
the anguish of dismissing familiar employees, contributing to sticky co...
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