Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding
This paper argues that the macroeconomically interesting features of inventory behavior are well captured by a model in which firms face only demand uncertainty with a nonnegativity constraint on inventories. Empirical implications of the "stockout-avoidance" model of inventory behavior are derived and then tested on disaggregated automobile industry data. The results largely support the model, though they suggest a small role for production-smoothing as well. Subsidiary evidence on the relative variance of demand and cost shocks suggests that demand shocks are indeed more important. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 107 (1992)
Issue (Month): 2 (May)
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