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Inventories and the Volatility of Production
James A. Kahn
The American Economic Review
Vol. 77, No. 4 (Sep., 1987), pp. 667-679
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1814538
Page Count: 13
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A stylized fact associated with inventory behavior is that the variance of production exceeds the variance of sales. This paper presents a model of production decisions with demand uncertainty that incorporates nonnegativity constraints on inventories. Even with no productivity shocks, optimal behavior by the firm is consistent with this stylized fact, either if demand exhibits positive serial correlation, or if the firm can backlog excess demand.
The American Economic Review © 1987 American Economic Association