Evaluating plant managers’ production plans over business cycles: asymmetric loss and rationality

This study examines monthly production plans, formed by plant managers, to investigate their asymmetric loss functions and rationality using a multivariate framework from 1998 to 2019. Since managers continuously revise their forecasts, the evaluation of the forecasts needs to consider the magnitude of the forecast revision from the previous forecast, and the forecast error between the revised forecast and realized values. Firms incur costs on the revision of the production plan, which requires redistribution of inputs and allocation of capital equipment. Firms also incur costs of storage of stocks or loss of sales opportunity because of updated monthly production plans. In comparison to the univariate asymmetric loss framework, our framework provides more reasonable estimates for asymmetry and better evidence of forecast rationality. The firms’ production plan is broadly likely to be over-predicted. In addition, they are likely to be revised downward in recessions, though no such, or less, asymmetry is found during expansions.