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Inventories, Production Length and International Trade

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square, Golden Gate 6
Hosted By: American Economic Association
  • Chair: George Alessandria, University of Rochester

Inventories, Integration, Productivity, and Welfare

George Alessandria
,
University of Rochester
Shafaat Yar Khan
,
Syracuse University
Armen Khederlarian
,
CUNY-Hunter College

Abstract

We augment a standard general equilibrium model of trade with inventory frictions and evaluate the implications of changes in tariffs on welfare and aggregate productivity gains. In the quantitative model, importers hold more inventories than non-importers owing to larger fixed costs and longer shipping delays. As tariffs fall, revenue expansion justifies more frequent payment of fixed ordering costs. Efficiency emanates from lower inventory holding costs due to a faster turnover. To assess the quantitative relevance of this channel we calibrate the model to match Colombia's producer-level data prior to the trade liberalization of the early 1990s. We compare gains from the observed trade liberalization in a standard trade model with those of the inventory-augmented one. There are two main results. First, the welfare gain from trade is 18% larger than in the standard no-inventory model. Second, the decomposition of the gain shows that more efficient inventory management accounts for 34% of the aggregate productivity gain. 

The Dynamic Costs of Delivery Risk

Maria José Carreras-Valle
,
Pennsylvania State University
Alessandro Ferrari
,
University of Zurich

Abstract

Since 2021, there has been a consistent decline in the distance traveled by U.S. manufacturing imports, reaching a level not observed since 2008. This trend is the result of near-shoring: imports from China are substituted by imports from Canada and Mexico. At the same time, U.S. manufacturing inventory-to-sales ratio has continued to rise. These trends are at odds with the literature which finds that reductions in the distance of imports are associated with a decline in inventories. We argue that a rise in delivery time risk, driven by longer and more frequent delays and supply disruptions, can reconcile these trends. We do so in the context of a model of global sourcing with stochastic delivery times and inventories, building on Carreras-Valle (2024). Firms trade off the lower price of farther inputs with the increase in exposure to demand risk and a higher risk of delays. In response, firms increase their inventories. Yet, as delivery time risk rises, firms substitute away from farther inputs and near-shore. While the composition effect decreases incentives to hold inventories, the rise in delivery risk pushes firms to increase their total inventory stock. We calibrate the model to quantify the costs of the increase in delivery time risk in terms of output, prices, and firms' sourcing choices.

Measuring the Average Period of Production

Pol Antràs
,
Harvard University
Vitalii Tubdenov
,
Harvard University

Abstract

The importance of time in production was emphasized by Classical economists and was at the core of the Austrian capital theory proposed by Böhm-Bawerk and further elaborated by Wicksell, Hicks, Dorfman, and many others. A central concept in this literature is the existence of an ‘average period of production’ which governs the demand for circulating capital associated with a production process. Building on Böhm-Bawerk (1889), we propose a measure of the average period of production as a (weighted) average temporal distance between the time at which a firm employs its inputs and the time at which these inputs deliver finished goods that are sold to consumers. We show that, under stationarity conditions, this measure corresponds to the ratio of a firm’s stock of inventories to the cost of the goods it sells in a given period. Using data from publicly traded companies worldwide, we compute this measure for various industries and countries, and show that, consistently with theory, this measure is lower, the higher is the cost of capital faced by firms.

Discussant(s)
Mike Sposi
,
Southern Methodist University
Ryan Kim
,
John Hopkins University
Chenzi Xu
,
University of California-Berkeley
JEL Classifications
  • F1 - Trade
  • F6 - Economic Impacts of Globalization