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Galeotti, Marzio
Guiso, Luigi
Sack, Brian
Schiantarelli, Fabio
Year of Publication: 
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 12.1997
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.
Production Smoothing
Cost Function
Document Type: 
Working Paper

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