Financial Returns to Household Inventory Management

Abstract

Households tend to hold substantial amounts of non-financial assets in the form of consumer goods inventories that are unobserved by traditional measures of wealth, about $1,100 on average. Such holdings can eclipse total financial assets among households in the lowest income quintile. Households can obtain significant financial returns from shopping strategically and optimally managing these inventories. In addition, they choose to maintain liquid savings – household working capital – not just for precautionary motives but also to support this inventory management. We demonstrate that households with low levels of inventory earn high returns from investing in household working capital, well above 20%, though returns decline rapidly as inventory levels increase. We provide evidence from scanner and survey data that supports this conclusion. Inventory management of consumer goods provides one alternative to investments in risky financial markets at low levels of liquid wealth and can induce uneven spending behavior alongside smooth consumption.