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Does Public Infrastructure Reduce Private Inventory?


  • Lai, Richard


The discipline of operations management is rarely studied with an eye on public policies. Yet, it is glaring to even the casual observer that public infrastructure is very different in different countries. How does public infrastructure affect private sector inventory levels? I develop as a baseline a substitution hypothesis, which predicts that infrastructure reduces inventory. I also consider competing hypotheses that can explain negative correlation between infrastructure and inventory. To empirically distinguish these hypotheses, I use data on public firms from 60 countries. The econometric challenge is in identifying the exogenous component of infrastructure changes. I address that using instrumental variables consisting of physical attributes of countries - such as their elevation, whether they are land-locked, their mean distance to a coast or river. I find evidence consistent with the substitution hypothesis. This finding is robust to many tests.

Suggested Citation

  • Lai, Richard, 2006. "Does Public Infrastructure Reduce Private Inventory?," MPRA Paper 4756, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4756

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    References listed on IDEAS

    1. Goonatilake, Lalith, 1990. "Inventory management in the manufacturing sector in developing countries," Engineering Costs and Production Economics, Elsevier, vol. 19(1-3), pages 19-24, May.
    2. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    3. Hong Chen & Murray Z. Frank & Owen Q. Wu, 2005. "What Actually Happened to the Inventories of American Companies Between 1981 and 2000?," Management Science, INFORMS, vol. 51(7), pages 1015-1031, July.
    4. Chikan, Attila & Whybark, D. Clay, 1990. "Cross-national comparison of production--inventory management practices," Engineering Costs and Production Economics, Elsevier, vol. 19(1-3), pages 149-156, May.
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    More about this item


    Inventory; public infrastructure; international comparison; instrumental variables;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management


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