Production and Inventory Dynamics Under Ambiguity Aversion

Speaker：Nie Jun, Professor and Dean, School of Economics and Management, Wuhan University

Host：Zeng Yan , Professor, Lingnan College

Time and Date：14:30, Dec. 22, 2023

Venue：Wong Ping-Lay Conference Room, Lingnan Hall (203) 

Language: English + Chinese

Abstract：

In this paper we propose a production-cost smoothing model with Knightian uncertainty due to ambiguity aversion to study the joint behavior of production, inventories, and sales. We find that when the representative firm makes the optimal decisions under the worst-case scenario, such a model can explain four facts simultaneously: (i) the high volatility of production relative to sales, (ii) the low ratio of inventory-investment volatility to sales volatility, (iii) the positive correlation between sales and inventory investment, and (iv) the negative correlation between the inventory-to-sales ratio and sales. We also find that the stock-out avoidance motive (Kahn 1987) emerges endogenously in our model due to a precautionary saving motive, reconciling the long debate in the inventory literature over the production-cost smoothing and the stock-out avoidance models. In contrast with more complex DSGE models, the main point we make here is that once we allow for a moderate degree of ambiguity aversion, a standard LQG inventory model can explain the data reasonably well, even without explicitly assuming the stockout avoidance motive.

Biography:

Jun Nie, Professor at the Economic and Management School of Wuhan University. He received bachelor degrees in both economics and mathematics from Wuhan University. He also holds a master degree and a doctor degree in economics from New York University. Broadly speaking, his research expertise is macroeconomics. Specifically, he conducts research in three areas. In the first area, he studies the effects of uncertainty on macroeconomics, including both model uncertainty and state uncertainty. In the second area, he quantitatively evaluates the effects of labor-market policies using structural models and micro data. In the third area, he works on GDP forecasting and the Chinese economy.

He has published papers on a wide range of top economic journals including The Economic Journal, Journal of Economic Theory, Journal of International Economics, Journal of European Economic Association, European Economic Review, Review of Economic Dynamics, and Journal of Economic Dynamics and Control. His research has been reported by main stream media including Wall Street Journal, Reuters, Bloomberg, Business Insider, Brookings, CNN, CBSNEWS, Market Morning Report, China Daily, Yahoo Finance. He is also a co-editor of Annals of Economics and Finance.