Production smoothing and the shape of the cost function

Arbeitspapier

We present estimates of inventory models based on firm level panel data and investigate whether over-simplified specification of the production technology may account for the frequent failure to find technological incentives to smooth production in the context of the standard linear-quadratic model of inventory behavior. In particular, we argue that if the role of quasi-fixed factors is not modeled properly, this may lead to inconsistent estimates of marginal costs and, therefore, to erroneous conclusions about the convexity/concavity of the cost function. The model is accordingly extended to allow for a general restricted quadratic cost function, on the assumption that capital is costly to adjust. The evidence obtained by estimating the standard inventory model on a panel of Italian manufacturing firms suggests that marginal costs are decreasing. However, this result is overturned when one allows for the general quadratic cost function with capital as a quasi-fixed input, implying that the firm's technology provides incentives to smooth production.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Nota di Lavoro ; No. 12.1997

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Investment; Capital; Intangible Capital; Capacity
• Subject: Inventories ; Production Smoothing ; Cost Function ; Lagerzyklus ; Kostenfunktion ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Galeotti, Marzio ; Guiso, Luigi ; Sack, Brian ; Schiantarelli, Fabio
• Event: Veröffentlichung
• (who): Fondazione Eni Enrico Mattei (FEEM)
• (where): Milano
• (when): 1997

Further information

• Handle: http://hdl.handle.net/10419/154776
• Last update: 10.03.2025, 11:42 AM CET