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Rethinking capacity utilization choice: the role of surrogate inventory and entry deterrence

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  • Thomas I. Palley

Abstract

This paper presents a macroeconomics-friendly Post Keynesian model of the firm describing both an inventory theoretic approach and an entry deterrence approach to choice of excess capacity. The model explains why firms may rationally choose to have excess capacity. It also shows the two approaches are complementary and reinforcing of each other. Analytically, the paper makes three principal contributions. First, it provides a simple framework for understanding the microeconomics of capacity utilization choice. Second, it reframes the Post Keynesian discussion of capacity utilization by making excess capacity choice the key to understanding normal capacity utilization. Third, it implicitly challenges Neo-Kaleckian wage-led growth theory as the model shows choice of the optimal excess capacity rate is independent of the level of demand.

Suggested Citation

  • Thomas I. Palley, 2021. "Rethinking capacity utilization choice: the role of surrogate inventory and entry deterrence," FMM Working Paper 61-2021, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:61-2021
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    File URL: http://www.boeckler.de/pdf/p_fmm_imk_wp_61_2021.pdf
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    Cited by:

    1. Louis Daumas, 2021. "Should we fear transition risks - A review of the applied literature," Working Papers 2021.05, FAERE - French Association of Environmental and Resource Economists.

    More about this item

    Keywords

    Capacity utilization; excess capacity; surrogate inventory; entry deterrence; wage-led growth;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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