Inventory Dynamics under Transaction Costs.

A conceptual model of storage behavior is developed. Optimal intertemporal pricing is derived to analyze the effects of transaction costs on storage and arbitrage pricing. It is shown how transaction costs can rationalize the existence of an inverse carrying charge for inventory. The model is applied to U.S. soy beans stocks for the period 1960-95. The empirical results suggest that transaction costs have a significant influence on storage behavior and intertemporal arbitrage pricing. Copyright 2000 by American Agricultural Economics Association