Inventories, Production Smoothing and the Shape of the Cost Function
AbstractIn this paper we present estimates of inventory models based on firm level panel data and investigate whether an over-simplified specification of the production technology may account for the failure to find technological incentives to smooth production in the context of the standard linear-quadratic model of inventory behaviour. In particular, we argue that if the role of quasi-fixed factors is not modelled properly, this may lead to inconsistent estimates of marginal costs and, therefore, to erroneous conclusions about the convexity/concavity of the cost function. The model is accordingly extended to allow for a general restricted quadratic cost function, on the assumption that capital is costly to adjust. The evidence obtained by estimating the standard inventory model on a panel of Italian manufacturing firms suggests that marginal costs are decreasing. This result is overturned when one allows for the general quadratic cost function with capital as a quasi-fixed input, however, implying that the firm’s technology provides incentives to smooth production. The conclusion that the cost function is convex in output is robust to allowing for adjustment costs for both capital and labour.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1697.
Date of creation: Oct 1997
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Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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- Marzio Galeotti & Louis J. Maccini & Fabio Schiantarelli, 2002.
"Inventories, employment and hours,"
0202, University of Bergamo, Department of Economics.
- Galeotti, Marzio & Maccini, Louis J. & Schiantarelli, Fabio, 2002. "Inventories, Employment and Hours," IZA Discussion Papers 458, Institute for the Study of Labor (IZA).
- Marzio Galeotti & Louis J. Maccini & Fabio Schiantarelli, 2002. "Inventories, Employment and Hours," Boston College Working Papers in Economics 522, Boston College Department of Economics.
- Marzio Galeotti & Louis J Maccini & Fabio Schiantarelli, 2002. "Inventories Employment and Hours," Economics Working Paper Archive 473, The Johns Hopkins University,Department of Economics.
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