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Inventories, Liquidity, and Contractual Risk in African Manufacturing

  • Marcel Fafchamps Jan Willem Gunning
  • Remco Oostendorp

This paper tests whether the stockout/precautionary motive applies to inventories and liquid assets held by Zimbabwean manufacturing firms. The evidence indicates that involvement in imports and exports is a major source of contractual risk. Concerns about the timeliness of input deliveries and late payment by clients are primary motives behind the accumulation of inputs and, to a lesser extent, the constitution of cash reserves. This is consistent with the role of inventories as a hedge against stockout risk. We find little evidence of inventory and liquidity build-up against market risk, but this may be an artifact of the way fluctuations in sales are measured in the data. Perfect fungibility between various inventories and between inventories and liquid assets is rejected. Implications for policy are discussed.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 97020.

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Handle: RePEc:wop:stanec:97020
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  2. Jeffrey A. Miron & Stephen P. Zeldes, . "Seasonality, Cost Shocks and the Production Smoothing Model of Inventories," Rodney L. White Center for Financial Research Working Papers 1-87, Wharton School Rodney L. White Center for Financial Research.
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  12. 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.
  13. Eichenbaum, Martin, 1989. "Some Empirical Evidence on the Production Level and Production Cost Smoothing Models of Inventory Investment," American Economic Review, American Economic Association, vol. 79(4), pages 853-64, September.
  14. Patricia C. Mosser, 1991. "Trade Inventories and (S,s)," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1267-1286.
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  20. Naish, Howard F, 1994. "Production Smoothing in the Linear Quadratic Inventory Model," Economic Journal, Royal Economic Society, vol. 104(425), pages 864-75, July.
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  22. Krane, Spencer D, 1994. "The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 117-36, February.
  23. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
  24. 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.
  25. Moheb Ghali, 1974. "Inventories, Production Smoothing, and the Accelerator: Some Empirical Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 149-157.
  26. Andrew B. Abel, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 283-293.
  27. McIntosh, James, et al, 1993. "Price and Output Adjustment in a Model with Inventories: Econometric Evidence from Categorical Survey Data," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 657-63, November.
  28. Milne, Alistair, 1994. "The Production Smoothing Model of Inventories Revisited," Economic Journal, Royal Economic Society, vol. 104(423), pages 399-407, March.
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