Showing papers on "Capacity utilization published in 2000"

Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat

Abstract: Consider a multinational firm that can produce for the world market from two countries. In each country the firm has to make a costly ex ante investment in capacity, after which each government chooses a tax rate, and then the firm determines output levels. If there were only one country there would be the standard timeinconsistency problem: The government would set a confiscatory tax ex post, the firm would realize this ex ante and no investment would be made. The interesting point of this paper is that the situation is very different when there are two countries. The firm invests in both countries so as to gain leverage ex post. If the firm holds more capacity than is needed to meet world demand, then this induces tax competition for capacity utilization among governments ex post because the firm can threaten to serve the market at least partially from a plant in a different country. Competition leads to low enough tax rates to justify the initial investment in excess capacity when capacity costs are sufficiently low.' When capacity costs are too high, the firm will not invest at all, as the standard timeinconsistency problem suggests. Thus the paper generates and combines tax competition and lack of government commitment within a single framework. The above logic provides also a novel argument for becoming a multinational firm. There is some evidence in support of the strategic use of excess capacity. For example, General Motors (GM) announced it will build almost identical plants in several risky countries, which allows GM to shift production easily. At the same time, the newly established capacity will probably exceed GM's sales. Another application is the problem of how multinationals export oil from the Caspian Sea. The Caspian Sea is surrounded by politically unstable countries. Multinationals started to build and lobby for multiple pipelines through several countries in order to keep transit fees low. These and other applications are discussed in more detail in Section V. The paper sheds new light on the relationship between multinational firms and host governments. On the one hand, a multinational firm can be viewed as the powerful agent in the relationship because the firm decides in which country to invest. Eager governments often offer substantial tax benefits in order to attract investment. This view is underlying the literature on tax competition (see, for example, John D. Wilson, 1986; Dan A. Black and William H. Hoyt, 1989; Ian King et al., 1993). On the other hand, and in a separate literature, multinational firms are portrayed as the potential victims of host governments, who may renege on tax promises after the firm has made a sunk investment and has become partially immobile (see, for example, Eric W. Bond and Larry Samuelson, 1989; Chris Doyle and Sweder van Wijnbergen, 1994; Jonathan Thomas and Tim Worrall, 1994). Hence, the host government is the powerful agent, and this may lead to underinvestment if anticipated by the firm.2 While both views capture elements of truth, it is unsatisfactory that our understanding of the relationship seems to * Department of Economics, University of Colorado, Boulder, CO 80309 (e-mail: janeba@colorado.edu). This research was undertaken while I was at Indiana University in Bloomington. I am grateful to Mike Baye, Susanne Janeba, Dave Schmidt, Greg Shaffer, Jay Wilson, and two anonymous referees, as well as participants at the Stanford Institute for Theoretical Economics 1998, and workshop participants at the Universities of Bonn, Colorado, Indiana, Michigan, Munich, Pennsylvania State, and Toronto for very helpful comments. The usual disclaimer applies. l In a different context, Patrick J. Kehoe (1989) considers also tax competition after a private-sector decision is made. In his model, however, atomistic individuals decide on savings and cannot influence the degree of tax competition. 2 It should be noted that in the second literature strand tax holidays are sometimes derived endogenously. In an infinite-horizon game, tax holidays help overcome lack of commitment. See, for instance, Doyle and van Wijnbergen (1994).

Dynamic modelling of surge effect and capacity limitation in supply chains

Abstract: Agile manufacturing has been defined as the capability of reacting to unpredictable market changes in a cost-effective way, simultaneously prospering from the uncertainty. In many industries, vigorously changing markets are demanding more differentiated products in lower volumes and within shorter delivery times. An uncertain environment challenges the response of supply chains. This paper demonstrates, by using a system dynamic simulation, how agility is built into supply chains. Three simulation models are analysed: first, the demand magnification effect in supply chain is studied. Secondly, the analysis is extended to capacity surge effects. Finally, the trade-off between capacity utilization and lead times is discussed. The analysis recommends smaller order sizes, echelon synchronization and capacity analysis as methods of improving the responsiveness of a supply chain. Evidence is provided from simulation runs and established literature. All three models are system dynamics based replications of well...

Capital Utilization, Maintenance Costs and the Business Cycle

Abstract: In this paper, we analyze the role played by capacity utilization and maintenance costs in the propagation of aggregate fluctuations. To this purpose we use an extension of the general equilibrium stochastic growth model that incorporates a depreciation technology depending upon both capital utilization and maintenance costs. In addition, we argue that maintenance activity must be countercyclical, because it is cheaper for the firm to repair and maintain machines when they are stopped than when they are being used. We show that the propa- gation mechanism associated with our technology assumption is quantitatively important: the countercyclicality of maintenance costs contributes significantly to the magnification and persistence of technology shocks.

Multi‐Output Capacity Measures and Their Relevance for Productivity

Abstract: In this paper, measures of capacity are developed following those suggested in 1968 by Leif Johansen. By taking advantage of Shephard’s duality, both primal and dual multi-output measures of capacity can be derived. Having generalized the capacity utilization measures, the authors show how these may be entered into measures of productivity. In particular, it is shown how the Malmquist direct and indirect productivity measures are related to various measures of capacity utilization.

System and method for real-time buying and selling of internet protocol (IP) transit

Abstract: An apparatus and method are described for real-time buying and selling of bandwidth at differentiated quality of service levels, routing of excess traffic over the bandwidth purchased in real time, and billing and settlement of the transactions. In the present invention, a network user buys bandwidth to have a fixed capacity level. When the current traffic level exceeds the fixed capacity level, the network user buys additional capacity in real time as needed to handle the overflow. In addition, when the fixed capacity level exceeds the current traffic level, the network user can sell the excess capacity as available. Further, network users can select among a number of response times. The response times, which can be guaranteed, allow all traffic to be delivered within a time limit, or set time limits within which different types of data can be delivered.

Are longer hours reducing productivity in manufacturing

Abstract: This paper provides statistical evidence of the effects of overtime hours on worker productivity using aggregate panel data for 18 manufacturing industries within the US economy. An economic production function model is specified and estimated using data for the years 1956‐1991 provided by the US Department of Labor, Bureau of Labor Statistics, the US Department of Commerce, and the Federal Reserve Board. Standard approaches are applied to specify and estimate a factor‐augmented production function model, with possible effects of overtime on productivity incorporated through the specification of factor effort functions. The empirical results suggest that use of overtime hours lowers average productivity, measured as output per worker hour, for almost all of the industries included in the sample. These results hold up under several alternative specifications and estimation techniques, including controls or corrections for autocorrelation, heteroskedasticity, rates of capacity utilization, and possible endogeneity of the constructed variable representing use of overtime hours.

The Malmquist Productivity Index and Plant Capacity Utilization

Abstract: A new decomposition of the Malmquist productivity index is proposed to account for changes in plant capacity utilization. Using a primal, non-parametric specification of technology, the Malmquist index is decomposed into technical efficiency change, variations in plant capacity utilization and frontier shifts. It provides an alternative to the available methods of incorporating capacity utilization changes into measures of productivity change. Such measures are based on parametric (and, in many cases, dual) technology specifications; moreover, they typically do not allow for technical inefficiency.

Airline network structure under demand uncertainty

Abstract: In this paper, we provide another reason that may explain the adoption of the hub-and-spoke network structure in the airline industry. We show that when an airline has to decide on its capacity before the demand conditions are perfectly known, a hub-and-spoke (h&s) network structure by pooling passengers from several markets into the same plane helps the firm to lower its cost of excess capacity in the case of low demand and to improve its capacity allocation in the case of high demand.

Capacity Utilisation and Excess Capacity: Theory, Evidence and Policy

Abstract: This paper models capacity utilisation as a cyclical variable that reflects both the value of precautionary capacity and the desire to hold strategic excess capacity. Business unit data from the Profit Impact on Marketing Strategy (PIMS) database of large, predominantly US, companies are used. Separate estimation is carried out for a number of SIC industry groups. Panel data estimation in first difference instrumental variable form is employed. Unlike many previous studies the utilisation variable is well determined. The results show significance for precautionary and strategic effects in particular industries. The paper discusses the reasons for the industry specificity of the results. Policy implications are discussed.

Kaleckian Models of Growth in a Stock-Flow Monetary Framework: A Neo-Kaldorian Model

Abstract: This paper presents a simple growth model grounded in a stock-flow monetary accounting framework. The framework ensures that all stocks and flows are accounted for and that the real and financial sides of the economy are coherent with one another. Credit, money, equities, and stocks of real capital link periods of time with one another in articulated sequences. Wealth is allocated between assets on Tobinesque principles but no equilibrium condition is necessary to bring the "demand" for money into equivalence with its "supply." Growth and profit rates, as well as valuation, debt, and capacity utilization ratios, are analysed using simulations in which a growing economy is assumed to be shocked by changes in interest rates liquidity preference, real wages, and the parameters that determine how firms finance investment.

Changing Nature of Competitive Advantage

Abstract: The most viable strategy for generating and sustaining competitive advantage has become one of both continuous innovation and corporate renewal. A sustainable competitive advantage is now essential for survival in a hyper-competitive global marketplace, with its rapidly vanishing borders. Capital and information flow with the speed of light anywhere in the world, bypassing regulatory, cultural and language barriers while undercutting central bank controls of exchange and interest rates, as well as capital flows. Nation-state sovereignty over both economic and financial affairs is rapidly eroding. These unprecedented time-compressed changes have been precipitated by an exponential increase in the rate of development of advanced technology, magnified by the demise of the Marxist-socialist paradigm which recently has released billions of people in the lesser developed countries (LDCs) to participate in global markets. Although the LDCs have limited access to cutting-edge new technologies, they can easily replicate existing operations. Consequently, any rice paddy can be transformed in a year or two to a state-of-the-art production facility operated by $2 dollar-an-hour labor. These new facilities can underprice comparable operations in the industrialized nations, and have also created an enormous glut of excess capacity in world markets. China and other Asian countries are currently operating below 50 percent of capacity while exporting at prices often below cost-a primary cause of the "Asian meltdown." Worldwide disinflationary effects of this phenomenon will likely persist until the excess capacity can be written off. Moreover, this excess capacity will require the "downsizing and reengineering" of many non-competitive large companies in the United States, Europe and Japan. In the U.S., downsizing has already seen the demise of many famous corporate names, and since 1982, a concomitant loss of about 40 million jobs-far exceeding job losses during the last great Depression. Simultaneously, however, (also since 1982), the U.S. has created 11 million new businesses and 80 million new jobs--over 50 percent of which have been high-paying professional, technical and managerial in nature (1). About 70-to-90 percent of the new jobs (depending on the year) were generated by the new businesses. This remarkable phenomenon, which Europeans have called the "American Miracle," has more than offset the downsizing process in the United States. Short-Term Competitive Advantage Japan and Europe have lagged in this restructuring process, while often continuing to rely on government protection and subsidies, or on attempting to be a "low-cost producer." In addition, Japan adopted the Boston Consulting Group (BCG) "fast-follower, targeted-industry, government-subsidized learning-curve" theory, which BCG first developed in the late 1960s (2). The theory provided Japan with a window of opportunity (since closed), which resulted (during the 1970s and early 1980s), in what appeared to be an invincible competitive advantage. BCG had observed that, on average, every doubling of volume in an industry resulted in a 20 percent or greater reduction in production costs. Therefore, by pricing below all competitors' costs, a market could be rapidly captured, and concomitantly increasing home production would soon bring costs down to breakeven or below. The interim negative cash flow sustained would be government-subsidized by providing essentially zero real interest rates, special subsidies, and elimination of the value-added tax for exports. Meanwhile, the home market would be protected from competition by tariffs to allow the same products to be priced higher than those for export (now called dumping). This strategy for achieving a competitive advantage was enormously successful for a time and led to rapid capture of market share in, for example, consumer electronics, machine tools, robots, textiles, shoes, fax machines, and by 1984, about 90 percent of the world market for semiconductor memory chips. …

Using aggregate estimation models for order acceptance in a decentralized production control structure for batch chemical manufacturing

Abstract: Aggregate models of detailed scheduling problems are needed to support aggregate decision making such as customer order acceptance. In this paper, we explore the performance of various aggregate models in a decentralized control setting in batch chemical manufacturing (no-wait job shops). Using simulation experiments based on data extracted from an industry application, we conclude that a linear regression based model outperforms a workload based model with regard to capacity utilization and the need for replanning at the decentralized level, specifically in situations with increased capacity utilization and/or a high variety in the job mix.

The shift level of the utilization of capacity as the stochastic variable in work sampling

Abstract: This paper aims to explain and justify the necessity and the importance of using the shift level of the utilization of capacity as the stochastic variable in determining the total level of the capacity utilization in the production process by using the method of work sampling. The aim of the paper is realized through experimental research on the work sample containing 74 Serbian companies. The conclusion is that the shift level of capacity utilization as the stochastic variable in work sampling is the model that solves the problem of determining the total level of capacity utilization in a convenient way with accurate results.

A note on the theory of demand-led growth

Abstract: this paper presents a demand-led growth model where an exogenous investment function drives capital accumulation through a Bernoulli differential equation. In such framework investment generates savings through changes in capacity utilization and/or income distribution, making economic growth totally demand-led. Taking a Structuralist perspective, the model is purposefully made to be consistent with different Keynesian closures for the investment function, as well as with different assumptions about savings’ adjustment to investment.

Measuring productivity dynamics with endogenous choice of technology and capacity utilization: an application to automobile assembly

Abstract: During the 1980s, all Japanese automobile producers opened assembly plants in North America. Industry analysts and previous research claim that these transplants are more productive than incumbent plants and that they produce with a substantially different production process. We compare the two production processes by estimating a model that allows for heterogeneity in technology and productivity. We treat both types of heterogeneity as intrinsically unobservable. In the model, plants choose technology before production starts. They condition subsequent input decisions on this choice. Maximum likelihood estimation is used to estimate the unconditional distribution of the technology choice, output, and inputs. The model is applied to a sample of automobile assembly plants. We control for capacity utilization, unobserved productivity differences, and price effects. The results indicate that there exist two distinct technologies. In particular, the more recent technology uses labor less intensively and it has a higher elasticity of substitution between labor and capital. Hicks-neutral productivity growth is estimated to be lower, while capital-biased (labor-saving) productivity growth is estimated significantly higher, for the new technology. Using the estimation results, we decompose industry-wide productivity growth in plant-level changes and composition effects, for both technologies separately. Plant-level productivity growth is further decomposed to reveal the importance of capital-biased productivity growth, increase in capital-labor ratio, and returns to scale.

Socially optimal capacity and capital structure in oligopoly: the case of the airline industry

Abstract: This paper explores the relationship between an air carrier's debt and its capacity. It is shown that the capacity chosen by a profit-maximizing carrier will be larger than the cost-minimizing capacity due to the effect of passengers' schedule delay. The paper also shows that in oligopolistic markets, the chosen capacity does not minimize the total social costs, which include both the carrier's private costs and passengers' schedule delay costs. Given that the airline industry is among the most highly leveraged industries, and that the heavy use of financial leverage would affect airlines' capacity decisions, this paper attempts to identify the capital structure that would lead to the socially optimal allocation of capacity. Results of an empirical examination of 10 major U.S. carriers suggest that the excessive debt load of the carriers appears to have led to excess capacity as compared with the social optimum.

The Foreign Exchange Constraints to Economic Adjustment: The case of Iran

Abstract: While a great deal of work has been devoted to the assessment of the effects of structural adjustment programmes, little is known about the relative importance of external financing and its contribution to the success of these adjustment programmes. This paper examines this question, using Iran's recent experience with an orthodox structural adjustment with its limited access to medium- and long-term external financing. Using the annual data for 1963-94, a three-gap model of growth is formulated and estimated in which economic growth is constrained by domestic saving, foreign exchange and public sector resource availability. The resulting foreign exchange-gap equation demonstrates a sharp trade-off between investment (capacity generation) and the capacity utilization rate. The model is simulated over the period 1995-99 under three growth path scenarios. The size of the foreign exchange gap under these growth path scenarios illustrates quite vividly the centrality of the foreign exchange constraint to the ...

Asymmetries in the capacity-inflation trade-off

Abstract: This paper analyzes the joint dynamics of two key macroeconomic variables for the conduct of monetary policy: inflation and the aggregate capacity utilization rate. An econometric procedure useful for estimating dynamic rational expectation models with unobserved components is developed and applied in this context. The method combines the flexibility of the unobserved components approach, based on the Kalman recursion, with the power of the general method of moments estimation procedure. A 'hyb id' Phillips curve relating inflation to the capacity utilization gap and incorporating forward and backward looking components is estimated. The results show that such a relationship in non-linear: the slope of the Phillips curve depends significantly on the magnitude of the capacity gap. These findings provide support for studying the implications of asymmetricmonetary policy rules.

Economies of scale and optimal selection of hydroelectric projects

Abstract: The authors define a purely hydroelectric power system as a power system consisting almost entirely of hydroelectric generating stations, where thermal backup stations are used only intermittently in dry periods. The expansion process for such a system consists of selecting from a set of available projects with certain investment cost and generating capacity characteristics. One of these characteristics is a measure of the economies of scale (EOS). In this paper, the EOS for hydroelectric projects are investigated by using available cost and capacity data from the Icelandic power system. Furthermore the tradeoff between large and small projects is investigated by weighting the lost sales during the period of excess capacity against the benefit of using larger projects due to the EOS. The optimum is shown graphically and depends on the demand growth and interest rate. The authors investigate a hypothetical example where a series of generating facilities can be replicated at will to satisfy a linear general demand. These results are then expanded by assuming a stepwise demand associated with each project to satisfy bulk energy demand such as that of an energy intensive industry. The results are illustrated graphically in a case study using data from the "purely hydroelectric" Icelandic power system.

Capacity utilization rates and unemployment rates: are they complements or substitutes in warning about future inflation?

Abstract: This research examines capacity utilization as a measure of economic slack in the US economy. Many macroeconomists have questioned the use of capacity utilization as a measure of economics slack on several fronts. The first issue revolves around the definition and accuracy of measurement of the capacity utilization rate in the US economy. Since this research uses existing Federal Reserve measures of capacity utilization, no insights into the definition and measurement issues are offered other than the fact that a consistent role was found for two different Fed measures of capacity utilization in explaining inflation. The second issue effectively involves the concern as to robustness of the link between the capacity utilization rate and inflation. There is indeed reason for the Federal Reserve to take note of changes in capacity utilization when trying to determine its policy position with regard to inflation. Clearly, the high capacity measure developed in this research offers distinct information about t...

Crowding in or Crowding Out? A Classical-Harrodian Perspective

Abstract: This paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. Give the normal rate of profit, the key determinant of growth is the social savings rate. Along the warranted path when growth is balanced and is financed via retained earnings and equity, the social savings rate can be shown to be equal to the flow of business and household savings less the money and government bond holdings of the aggregate private sector-that is, it equals the flow of investable surplus available to firms to finance investment. An increase in the budget deficit always raises short-run output growth, although the stimulus is slowed down by the accumulation of debt by firms. However, with a fixed private savings rate, an increase in the deficit lowers the warranted path. If raising the warranted path is desired, appropriate policies that would raise the social saving rate would have to be implemented. As in Harrod, whether crowding out is harmful depends on the rate of warranted growth relative to the natural growth rate.

Optimal prices and costs for hospitals with excess bed capacity

Abstract: This paper analyses theoretically and empirically issues in optimal pricing with excess hospital capacity, and then applies the analysis to the issue as to whether Medicare and Medicaid payments cover the marginal costs of treating patients of each type. The primary innovation of this paper lies in incorporating appropriate theoretical measures of hospital excess capacity to a multiproduct empirical hospital cost function, and in showing how proper measures of marginal cost can be applied to the examples of Medicare and Medicaid reimbursement in California. With a standard translog specification that ignores hospital excess capacity, the estimated marginal costs of Medicare and Medicaid patients are higher than the reimbursement. However, correctly incorporating excess capacity into our model leads to considerably lower estimates of short-run marginal costs, suggesting that Medicare hospital reimbursement is more than adequate in the short run. We also develop a third marginal cost concept, that of what l...

Industrial Production and Capacity Utilization: Recent Developments and the 1999 Revision

Abstract: In late 1999, the Federal Reserve published revised measures of industrial production, capacity, and capacity utilization for the period January 1992 through October 1999. The updated measures reflect both the incorporation of newly available, more comprehensive source data typical of annual revisions and the introduction of improved methods for compiling a few series, including computer and office equipment and motor vehicles. The new source data are for recent years, primarily from 1997 on, and the modified methods affect data beginning in 1992. ; The production index for the third quarter of 1999 is at 137.7 percent of output in 1992, compared with 135.2 percent reported before the annual revision, and the capacity index is 170.7 percent of output in 1992, compared with 167.9 percent reported previously. As a result, the rate of industrial capacity utilization was revised up 0.1 percentage point, to 80.7 percent for the third quarter of 1999.

A Dynamic, Keynesian Model of Development

Abstract: *The Harrod-Domar growth model is extended in a way that introduces the possibility of persistent excess capacity as a potential source of slow growth. This extended model has five growth rates, which must be equal for there to be a full -employment, full-capacity dynamic equilibrium, instead of the three growth rates in the standard Harrod-Domar model. These growth rates will be called the justified, the actual, the warranted, the potential and the natural rate of growth. This model is held to provide a consistent framework for discussing many disparate view of economic development. Specifically, much of development theory can be divided in to three types of theories, which focus on different structural rigidities in the economy. First, there are theories that emphasize a lack of saving and thus propose mechanisms for augmenting saving. Second, theories emphasizing a shortage of investment and thus the existence of excess capacity. Third, there are theories emphasizing inadequate labor absorption and the need to develop or employ labor by using capital saving technology. It is argued that the essence of Keynesian development economics is the belief that the development process is served better by pursuing policies that enhance growth with existing obstacles than by simply trying to remove these obstacles in the hope that development will then occur.

The 1989 Change in the Definition of Capacity: A Plant-Level Perspective

Abstract: The Survey of Plant Capacity (SPC) is the primary source of data used to construct the Federal Reserve's manufacturing utilization rates. A major restructuring of the SPC in 1989 presents a potential obstacle to constructing measures of utilization that are consistent over time. The object of this study is to take advantage of plant-level data that is available at the Census Bureau's O±ce of the Chief Economist to thoroughly reexamine the link between the historical and current measures of capacity. The preponderance of evidence in this study suggests that preferred utilization is consistent with \full" utilization and, therefore, supports the underlying Federal Reserve methodology for estimating capacity utilization.