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Non-Convex Costs and Capital Utilization: A Study of Production Scheduling at Automobile Assembly Plants

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Author Info
George J. Hall (Dept. of Economics, Yale University)

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Abstract

This paper studies how managers at automobile assembly plants organize production across time. Detailed data from eleven single-source automobile assembly plants display considerable cross-plant heterogeneity. At plants which make low- and medium-selling vehicles the capital stock often sits idle, production is more variable than sales, and week-long shutdowns are often used to vary output. In contrast, at plants which make high-selling vehicles, the capital stock rarely sits idle, production is about as variable as sales, and over time -- bit week-long shutdowns -- is most frequently used to vary output. To explain this difference in production scheduling, I formulate and solve a dynamic programming model of a plant manager. The solution to the dynamic program predicts that when sales are low, non-convexities at the plant level induce the manager to bunch production at points of low average cost; thus, the manager uses less than full capital utilization on average and makes production more volatile than sales. When sales are high, the plant operates in a convex region of the cost curve. Hence the manager employs high levels of capital utilization and makes production less volatile than sales.

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File URL: http://cowles.econ.yale.edu/P/cd/d11b/d1169.pdf
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Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1169.

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Length: 38 pages
Date of creation: Dec 1997
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Handle: RePEc:cwl:cwldpp:1169

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June. [Downloadable!] (restricted)
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  2. Shapiro, Matthew D, 1993. "Cyclical Productivity and the Workweek of Capital," American Economic Review, American Economic Association, vol. 83(2), pages 229-33, May. [Downloadable!] (restricted)
  3. Joe Mattey & Steve Strongin, 1995. "Factor utilization and margins for adjusting output: evidence from manufacturing plants," Finance and Economics Discussion Series 95-12, Board of Governors of the Federal Reserve System (U.S.).
  4. Russell Cooper & John Haltiwanger, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," NBER Working Papers 3552, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Lucas, Robert E, Jr, 1970. "Capacity, Overtime, and Empirical Production Functions," American Economic Review, American Economic Association, vol. 60(2), pages 23-27, May. [Downloadable!] (restricted)
  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181. [Downloadable!] (restricted)
  7. Bresnahan, Timothy F & Ramey, Valerie A, 1994. "Output Fluctuations at the Plant Level," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 593-624, August. [Downloadable!] (restricted)
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  8. Ana M. Aizcorbe & Sharon Kozicki, 1995. "The comovement of output and labor productivity in aggregate data for auto assembly plants," Finance and Economics Discussion Series 95-33, Board of Governors of the Federal Reserve System (U.S.).
  9. Cooper, Russell W. & Haltiwanger, John Jr., 1992. "Macroeconomic implications of production bunching : Factor demand linkages," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 107-127, October. [Downloadable!] (restricted)
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  10. Blinder, Alan S & Maccini, Louis J, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter. [Downloadable!] (restricted)
  11. Blanchard, Olivier J. & Melino, Angelo, 1986. "The cyclical behavior of prices and quantities: The case of the automobile market," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 379-407, May. [Downloadable!] (restricted)
  12. Aizcorbe, Ana M, 1992. "Procyclical Labour Productivity, Increasing Returns to Labour and Labour Hoarding in Car Assembly Plant Employment," Economic Journal, Royal Economic Society, vol. 102(413), pages 860-73, July. [Downloadable!] (restricted)
  13. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April. [Downloadable!] (restricted)
  14. Stephen G. Cecchetti & Anil K Kashyap & David W. Wilcox, 1995. "Do Firms Smooth the Seasonal in Production in a Boom? Theory and Evidence," NBER Working Papers 5011, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
  16. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-89, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Valerie A. Ramey & Daniel J. Vine, 2005. "Declining Volatility in the U.S. Automobile Industry," NBER Working Papers 11596, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Adam Copeland & Wendy Dunn & George Hall, 2005. "Prices, production, and inventories over the automotive model year," Finance and Economics Discussion Series 2005-25, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Jonathan McCarthy & Egon Zakrajsek, 2000. "Microeconomic inventory adjustment: evidence from U.S. firm-level data," Finance and Economics Discussion Series 2000-24, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Valerie A. Ramey & Daniel J. Vine, 2005. "Tracking the source of the decline in GDP volatility: an analysis of the automobile industry," Finance and Economics Discussion Series 2005-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. George J. Hall & John Rust, 1999. "An Empirical Model of Inventory Investment by Durable Commodity Intermediaries," Cowles Foundation Discussion Papers 1228, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  6. Adam Copeland & George Hall, 2005. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," NBER Working Papers 11870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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