Aggregation and Testing of the Production Smoothing Hypothesis.

This paper examines the aggregate implications of the production smoothing model. The analysis indicates that aggregation can be a source of bias distorting tests of production smoothing based on the relative variance of production and sales. It is shown that, depending upon the relative variability of different types of market shocks firms face, the aggregation bias can be so severe as to render the test of the production smoothing hypothesis invalid. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.