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 Str ategy (PIMS) database of large, predominantly US, companies are used. Separ ate estimation is carried out for a number of SIC industry groups. Panel da ta estimation in first difference instrumental variable form is employed. U nlike many previous studies the utilisation variable is well determined. Th e results show significance for precautionary and strategic effects in part icular industries. The paper discusses the reasons for the industry specifi city of the results. Policy implications are discussed.