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Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets

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  • Andrew Coleman

    (Motu Economics)

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    Abstract

    This paper argues that localized price spikes should be a regular feature of competitive commodity markets. It develops a rational expectations model of physical arbitrage in which trade takes time, and shows that inventory management plays a crucial role in the way regional prices are determined. In equilibrium, arbitrageurs choose export quantities to ensure inventories in the importing center regularly fall to 0. They earn enough profits from high prices on these occasions to offset small losses at other times. An analysis of detailed data from Chicago and New York corn markets provides empirical support for the model. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.91.2.332
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    Bibliographic Info

    Article provided by MIT Press in its journal The Review of Economics and Statistics.

    Volume (Year): 91 (2009)
    Issue (Month): 2 (May)
    Pages: 332-350

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    Handle: RePEc:tpr:restat:v:91:y:2009:i:2:p:332-350

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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    Cited by:
    1. Christophe Gouel, 2013. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
    2. Larson, Donald F. & Lampietti, Julian & Gouel, Christophe & Cafiero, Carlo & Roberts, John, 2012. "Food security and storage in the Middle East and North Africa," Policy Research Working Paper Series 6031, The World Bank.
    3. Christophe Gouel & Sébastien Jean, 2012. "Optimal Food Price Stabilization in a Small Open Developing Country," Working Papers 2012-01, CEPII research center.
    4. Sharp, Paul & Weisdorf, Jacob, 2013. "Globalization revisited: Market integration and the wheat trade between North America and Britain from the eighteenth century," Explorations in Economic History, Elsevier, vol. 50(1), pages 88-98.
    5. Steinwender, Claudia, 2013. "Information Frictions and the Law of One Price: “When the States and the Kingdom became United”," CEPREMAP Working Papers (Docweb) 1314, CEPREMAP.

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