DUAL DECISIONS OF FIRMS, INVENTORY STOCK, AND QUANTITY EXPECTATIONS

Abstract

This paper extends existing inventory literature by introducing current and future quantity constraints into a model of inventory holding behavior. It provides a framework for the analysis of the impact of future quantity expectations on current decisions, a concept that is used in the temporary equilibrium with quantity rationing literature but lacks a theoretical rationale. And it also shows that the more optimistic the firm is about future sales the more labor it will hire and therefore the more output it will produce. In addition, it shows that the extrinsic uncertainty of sales rationing induces the firm to hold less inventories.