Flexible accelerator, Inventory behavior, Adjustment costs
Econometrics | Economics
The flexible accelerator concept has provided the rationale for the regression equations used in several recent econometric studies of inventory behavior. In such a model a desired (or equilibrium) level of inventories is defined, but because of costs involved in changing the level of stocks only a partial adjustment of inventories to their desired level is achieved in any time period. This leads to the familiar decision rule in which current inventory is a linear function of the previous period's stock plus a variable or set of variables representing current demand.
The purpose of this note is to question whether there are any significant costs specifically associated with changing the level of inventories other than those directly associated with changes in the level of production which may (or may not) be required to bring about the necessary stock adjustment. If none exist, it is shown that a given time pattern of demand can lead a firm which acts according to the flexible accelerator to behave "irrationally" and incur unnecessary costs. Finally, an amended version of the flexible accelerator is presented, and the resulting equation for inventories is compared with that derived from the original model.
Hay, George A., "Adjustment Costs and the Flexible Accelerator" (1970). Cornell Law Faculty Publications. 1166.
Published in: Quarterly Journal of Economics, vol. 84, no. 1 (February 1970).