This study examines the determinants of inventory investment under joint production. We simultaneously estimate a set of optimal sales relations, variable input demands, and a set of Euler equations for capital and inventories of raw materials, work in process, and final products in the petroleum refining industry. The Euler conditions provide a model for the convenience yield discussed in the returns-to-storage literature. The cost savings from holding inventories and expected changes in marginal production costs are important components of the convenience yield. We also find significant cost and stock interactions that may affect short-run price and inventory dynamics in petroleum product markets.

This paper demonstrates that a linear logit model, with appropriate constraints, can be used to specify a system of cost share equations that satisfy neoclassical economic conditions. Unlike many other flexible functional forms, the logistic function is particularly well suited for incorporating dynamic adjustment mechanisms. The empirical results suggest that the use of static models overstates short-run own-price elasticities and understates the corresponding long-run price effects.