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  • 1980
  • Working Paper

Components of Manufacturing Inventories: A Structural Model of the Production Process

By: Alan J. Auerbach and Jerry R. Green
  • Format:Print
  • | Language:English
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Abstract

This paper presents a structural model of production and inventory accumulation based on the hypothesis of cost minimization. It differs from previous attempts in several respects. First, it integrates the analysis of input inventories with output inventories, treating the two stocks separately. Second, it distinguishes between temporary and permanent fluctuations in sales as they are anticipated by the industry. Third, it allows for a more general structure of adjustment costs, and in particular for a cost changing the production level rather than only for deviations of the production level from a fixed target. Empirically, there are three principal conclusions. This model performs much better than those with no cost of production adjustment allowed. Disaggregation of inventories provides significant insights into the dynamics of the adjustment process. However, the restrictions on our model implied by the continuous time stochastic control theory that we utilize are rejected by the data. We believe that a more disaggregated specification or a more detailed econometric treatment of the discrete-time nature of the observations would avoid this difficulty.

Citation

Auerbach, Alan J., and Jerry R. Green. "Components of Manufacturing Inventories: A Structural Model of the Production Process." NBER Working Paper Series, No. 491, June 1980.
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About The Author

Jerry R. Green

Negotiation, Organizations & Markets
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  • Assent-maximizing Social Choice By: Katherine A. Baldiga and Jerry R. Green
  • Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms By: Marco Archetti, Francisco Ubeda, Drew Fudenberg, Jerry R. Green, Naomi E. Pierce and Douglas W. Yu
  • Choice-based Measures of Conflict in Preferences By: Katherine Baldiga and Jerry R. Green
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