Capacity Utilisation and Excess Capacity: Theory, Evidence, and Policy

This paper models capacity utilisation as a cyclical variable that reflects both the value of precautionary capacity and the desire to hold strategic excess capacity. Business unit data from the Profit Impact on Marketing Strategy (PIMS) database of large, predominantly US, companies are used. Separate estimation is carried out for a number of SIC industry groups. Panel data estimation in first difference instrumental variable form is employed. Unlike many previous studies the utilisation variable is well determined. The results show significance for precautionary and strategic effects in particular industries. The paper discusses the reasons for the industry specificity of the results. Policy implications are discussed.