| The three essays which comprise the dissertation explore three different problems where transactions costs play an important role. The first essay analyzes the optimal size of an inventory when each order of goods requires payment of fixed transactions costs. The conditions under which the "two-bin" (S,s) rule is optimal are derived. This decision rule states that if the inventory level falls below the threshold s, an order to the target S is made; otherwise no order is placed. By using a continuous time framework and optimal control methods, it is shown that the (S,s) rule is optimal under far more general conditions than the inventories literature suggests. For example, even when the demand is not exogenous but can be controlled by the firm, the (S,s) rule will be optimal. Similarly, it is shown that when the marginal cost is not constant but decreasing, convergence to a unique (s,S) interval will take place in only a few steps.;The second essay augments the (S,s) rule by allowing for an upper threshold, H, to get an (s,S,H) decision rule. Now, action occurs when stock rises to H or falls to s. The main application is to the demand for money. The optimality of the (s,S,H) rule in the presence of fixed costs of changing the stock upwards or downwards is proven by employing a generalized definition of K-convexity. It is also shown that if new information about demand flows each period, the optimal rule will be time-dependent (s,S,H) rule.;The last essay is a study of the demand for durable goods in the presence of transactions costs. It is demonstrated that each consumer will adhere to an (S,s) rule where both are proportional to total life-time resources. By explicitly aggregating over the population, the aggregate consumption of durables is derived. Aggregate expenditures is shown to be more sensitive than individuals expenditures to changes in income. The applications of this to the validity of the life cycle - permanent income hypothesis are examined, both in the short and the long run. The empirical findings seem to confirm the theoretical predictions. |
