Production Rate and Contractor Behavior

Abstract

There has been much interest in recent years in the relationships among learning, production rate, and program costs. These relationships are of particular interest in military acquisitions research where, because of the nature of the funding process, the government must assess the cost impact of numerous production rate changes. One approach that is often used to analyze the problem is an empirical application of the “Alchian cost function.” Department of Defense analysts routinely use these models for planning purposes. The purpose of this paper is to demonstrate that the models as being applied imply nonsensical contractor behavior.