In this paper we propose a production-cost smoothing model with Knightian uncertainty and ambiguity aversion to study the joint behavior of production, inventories, and sales. Our model can explain ten facts that previous studies find difficult to account for simultaneously including the high volatility of production relative to sales, the low ratio of inventory-investment volatility to sales volatility, the positive correlation between sales and inventory investment, and the negative correlation between the inventory-to-sales ratio and sales. Our main results extend to a model of endogenous sales. Finally, we find that the stock-out avoidance motive emerges endogenously in our model, reconciling the long debate in the inventory literature over the production-cost smoothing and stock-out avoidance models.
- Ph.D., M.A., Princeton University
- B.S., Wuhan University
Prof. Yulei LUO graduated from Wuhan University in 1997 with B.S. in Electronics and Information System, and obtained his Ph.D. in Economics from Princeton University in 2005. He joined the Faculty of Business and Economics (now HKU Business School) in 2006 and became Associate Professor in 2012.
Yulei’s research interests are in macroeconomics, asset pricing, and international finance. He has papers published in academic journals including Management Science,Journal of Economic Theory, Journal of International Economics, American Economic Journal: Macroeconomics, Journal of the European Economic Association, European Economic Review, Review of Economic Dynamics, Journal of Money, Credit and Banking, Journal of Economic Dynamics and Control, Economic Inquiry, and Macroeconomic Dynamics.
Yulei has done some work on sticky information, robustness, and aggregate fluctuations. He has also studied the implications of idiosyncratic shocks and incomplete markets on wealth inequality and aggregate dynamics. His current research interests are about optimal consumption-savings and portfolio rules under induced uncertainty, and their implications for asset pricing, business cycles, and welfare.
- Macroeconomics
- Asset Pricing
- International Finance
Publications in Refereed Journals:
- “Production and Inventory Dynamics under Ambiguity Aversion,”
(with Jun Nie, Xiaowen Wang and Eric R. Young), Journal of Monetary Economics, forthcoming. - “Ambiguity, Information Processing, and Financial Intermediation,”
(with Leyla Jianyu Han and Kenneth Kasa), Journal of Economic Theory 222, 2024, 105922. - “Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism,”
(with Qichun He, Jun Nie, and Heng-fu Zou), Review of Economic Dynamics 47, 2023, pp. 346-372. - “Ignorance, Pervasive Uncertainty, and Household Finance,”
(with Jun Nie and Haijun Wang), Journal of Economic Theory 199, 2022, 105204. - “Robust Investment Strategies with Two Risky Assets,”
(with Qian Lin and Xianming Sun), Journal of Economic Dynamics and Control 134, 2022, 104275. - “Ambiguity, Low Risk-Free Rates, and Consumption Inequality,”
(with Jun Nie and Eric R. Young), The Economic Journal 130(632), 2020, pp. 2649-2679. - “Portfolio Choice with Information-Processing Limits,”
(with Altantsetseg Batchuluun and Eric R. Young), Annals of Economics and Finance 20(1), 2019, pp. 137-162. - “Rational Inattention and the Dynamics of Consumption and Wealth in General Equilibrium,”
(with Jun Nie, Gaowang Wang, and Eric R. Young), Journal of Economic Theory 172, 2017, pp. 55-87. - “Elastic Attention, Risk Sharing, and International Comovements,”
(with Wei Li and Jun Nie), Journal of Economic Dynamics and Control 79, 2017, pp. 1-20. (Lead Article) - “Robustly Strategic Consumption-Portfolio Rules with Informational Frictions,”
Management Science 63(12), 2017, pp. 4158-4174. - “Induced Uncertainty, Market Price of Risk, and the Dynamics of Consumption and Wealth,”
(with Eric R. Young), Journal of Economic Theory 163, 2016, pp. 1-41. (Lead Article) - “Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention,”
(with Eric R. Young), Journal of Money, Credit and Banking 48(2-3), 2016, pp. 325-362. - “Attention Misallocation, Social Welfare, and Policy Implications,”
(with Heng Chen and Guangyu Pei), Journal of Economic Dynamics and Control 59, 2015, pp. 37-57. - “Slow Information Diffusion and the Inertial Behavior of Durables Consumption,”
(with Jun Nie and Eric R. Young), Journal of the European Economic Association 13(5), 2015, pp. 805-840. - “Model Uncertainty and Intertemporal Tax Smoothing,”
(with Jun Nie and Eric R. Young), Journal of Economic Dynamics and Control 45, 2014, pp. 289-314. - “Robust Control, Informational Frictions, and International Consumption Correlations,”
(with Jun Nie and Eric R. Young), European Economic Review 67, 2014, pp. 1-27. (Lead Article) - “Signal Extraction and Rational Inattention,”
(with Eric R. Young), Economic Inquiry 52(2), 2014, pp. 811-829. - “Robustness, Information-processing Constraints, and the Current Account in Small Open Economies,”
(with Jun Nie and Eric R. Young), Journal of International Economics 88(1), 2012, pp. 104-120. - “Rational Inattention, Long-run Consumption Risk, and Portfolio Choice,”
Review of Economic Dynamics 13(4), 2010, pp. 843-860. - “Asset Pricing under Information-processing Constraints,”
(with Eric R. Young), Economics Letters 107(1), 2010, pp. 26-29. - “Risk-sensitive Consumption and Savings under Rational Inattention,”
(with Eric R. Young), American Economic Journal: Macroeconomics 2(4), 2010, pp. 281-325. - “A Note on Entrepreneurial Risk, Capital Market Imperfections, and Heterogeneity,”
(with Liutang Gong and Heng-fu Zou), Macroeconomic Dynamics 14(2), 2010, pp. 269-284. - “The Spirit of Capitalism and Excess Smoothness,”
(with Williams T. Smith and Heng-fu Zou), Annals of Economics and Finance 10(2), 2009, pp. 281-301. - “Rational Inattention and Aggregate Fluctuations,”
(with Eric R. Young), The B.E. Journal of Macroeconomics: Vol. 9: Iss. 1 (Contributions), 2009, Article 14, pp. 1-41. - “The Spirit of Capitalism, Precautionary Savings, and Consumption,”
(with Williams T. Smith and Heng-fu Zou), Journal of Money, Credit and Banking 41(2-3), 2009, pp. 543-554. - “The Wealth Distribution and the Demand for Status,”
(with Eric R. Young), Macroeconomic Dynamics 13(S1), 2009, pp. 1-30. (Lead Article) - “Consumption Dynamics under Information Processing Constraints,”
Review of Economic Dynamics 11(2), 2008, pp. 366-385.
Book Chapters:
- “Model Uncertainty, State Uncertainty, and State-Space Models,”
(with Jun Nie and Eric R. Young), in State Space Models — Application in Economics and Finance, Springer-Verlag, 2012. - “Social Status and the Term Structure of Interest Rates in Stochastic Production Economies,”
(with Liutang Gong and Heng-fu Zou), in Economic Dynamics: Theory, Games and Empirical Studies, Nova Science Publisher, 2009.
This paper incorporates ambiguity and information processing constraints into the He and Krishnamurthy (2012) model of intermediary asset pricing. Financial intermediaries possess greater information processing capacity than households. In response, households optimally choose to delegate their investment decisions. The contractual relationship between households and intermediaries is subject to a moral hazard friction, which results in a financial constraint. We show that ambiguity aversion not only amplifies households' incentives to delegate but also tightens the financial constraint. The calibrated model can quantitatively explain both the unconditional and time-varying moments of observed asset prices while endogenously generating an empirically consistent crisis frequency.