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Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding

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  • James A. Kahn

Abstract

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.

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  • James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 481-510.
    • Handle: RePEc:oup:qjecon:v:107:y:1992:i:2:p:481-510.
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    File URL: http://hdl.handle.net/10.2307/2118479
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