Working Paper: CEPR ID: DP2557
Authors: Rudolf Kerschbamer; Yanni Tournas
Abstract: This paper analyses the impact of variations of product demand on the amount of internal slack in multi-plant firms in a model in which facilities can produce output at a privately known cost up to a previously-determined capacity level. In such a model, the amount of slack in the firm is shown to be pro-cyclical. Indeed, as capacity constraints become tighter in booms, slack increases in booms, because the power of in-house competition is reduced, while the opposite is true in downturns. Also, in downturns the firm may use high-cost facili-ties even when low-cost plants are not running at capacity.
Keywords: capacity; competition; demand fluctuations; slack
JEL Codes: D20; D82; F23; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic conditions (business cycle) (E32) | organizational slack (D20) |
| product demand (R22) | organizational slack (D20) |
| organizational slack (D20) | intensity of competition among facilities (L11) |
| intensity of competition among facilities (L11) | organizational slack (D20) |
| demand fluctuations (E32) | capacity investment decisions (D25) |