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

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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 for Research in Economics, 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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Publication status: Published in Journal of Monetary Economics (June 2000), 45(3): 681-716
Handle: RePEc:cwl:cwldpp:1169

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  1. 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.
  2. Bresnahan, Timothy F., 1981. "Departures from marginal-cost pricing in the American automobile industry : Estimates for 1977-1978," Journal of Econometrics, Elsevier, vol. 17(2), pages 201-227, November.
  3. 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.
  4. Anil K. Kashyap & David W. Wilcox, 1992. "Production and inventory control at the General Motors Corporation during the 1920s and 1930s," Working Paper Series, Macroeconomic Issues 92-10, Federal Reserve Bank of Chicago.
  5. 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.).
  6. Anderson, Patricia M & Meyer, Bruce D, 1993. "Unemployment Insurance in the United States: Layoff Incentives and Cross Subsidies," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages S70-95, January.
  7. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  8. Olivier J. Blanchard, 1982. "The Production and Inventory Behavior of the American Automobile Industry," NBER Working Papers 0891, National Bureau of Economic Research, Inc.
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  12. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  13. 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.
  14. 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.
  15. Shapiro, Matthew D, 1993. "Cyclical Productivity and the Workweek of Capital," American Economic Review, American Economic Association, vol. 83(2), pages 229-33, May.
  16. Lucas, Robert E, Jr, 1970. "Capacity, Overtime, and Empirical Production Functions," American Economic Review, American Economic Association, vol. 60(2), pages 23-27, May.
  17. 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.).
  18. 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.
  19. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  20. Alan S. Blinder & Louis J. Maccini, 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.
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