PREVENTABLE FOOD BORNE ILLNESS WITH DOSE-RESPONSE DAMAGES: OPTIMAL SHARING OF PREVENTION BETWEEN CONSUMERS AND PROCESSORS AND THE EFFECT OF PRODUCT LIABILITY

As public concern for food safety burgeons concerned policy makers search for ways to manage the risk inherent to food consumption. Product liability laws may serve as efficient means to induce socially optimal levels of care or may efficiently complement regulation of potentially injurious activities. However, two characteristics common to many food borne illness cases are often not considered in the standard liability economics model that yields these prescriptions: dose-response damage functions and victim damage prevention. This paper explores how dose-response relationships common to the biology and epidemiology of food borne illness may effect the shape of resulting social welfare functions and privately chosen prevention efforts under different liability rules when both processor and consumer affect damages. Dose-response damage functions yield social objectives with multiple local optima that may dictate diametrically opposite policy prescriptions in terms of prevention sharing between consumer and processor. Small changes in the relative efficacy of either party's preventative effort may dictate discrete changes in the socially optimal prescription. Similarly, legal rules that fail to recognize both parties' contribution to damage (e.g., strict processor or consumer liability) or incorrectly define due care standards for processor negligence or contributory negligence may cause private decisions to differ discretely from socially optimal behavior.Food borne illness, dose-response, liability, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety,

Comparing the Risk Attitudes of U.S. and German Farmers

Risk and Uncertainty,

THE DESIGN AND PRICING OF FIXED AND MOVING WINDOW CONTRACTS: AN APPLICATION OF ASIAN-BASKET OPTION PRICING METHODS TO THE HOG FINISHING SECTOR

Asian-Basket type moving window contracts are an increasingly used risk management tool in US hog sector. The moving window contract is decomposed into a portfolio of a long Asian-Basket put and a short Asian-Basket call option. A projected breakeven price is used to determine the floor price, and then Monte Carlo simulation methods are used to price both a moving and a fixed window contract. These methods provide unbiased pricing of fixed and moving window hog finishing contracts of one-year duration.Livestock Production/Industries,

EXPLAINING ECONOMIC LINKAGES BETWEEN FARMS AND LOCAL COMMUNITIES: LOOKING BEYOND FARM SIZE

We explore the economic linkage between farms and neighboring communities using primary data collected from a state-wide cross section of 461 dairy farms. Empirical results implicate not only farm characteristics such as size, operator tenure and ethnicity but also the characteristics of the local community.Institutional and Behavioral Economics,

Underpinnings for Prospective, Net Revenue Forecasting in Hog Finishing: Characterizing the Joint Distribution of Corn, Soybean Meal and Lean Hogs Time Series

This research focuses on developing a biannual net revenue forecasting model for hog producers based on Monte Carlo simulation of the joint distribution of hog, corn and soybean meal price series. The relative forecasting power of historical volatility, implied volatility and GARCH-based volatility is examined. Consistent with recent research, the performance of these three methods is both commodity and horizon specific, which means there is no single best predictor. However, implied volatility often performs well. Thus, implied volatility is used to forecast variance. Historical covariance is introduced to capture the co-movement of the three price series. Our forecasting model performs well out of sample; most of the realized net revenues fall in 95 percent prediction interval. Based on this forecasting model and the assumption of a utility function, we compare our prospective evaluation with retrospective evaluation of risk management strategies. Though prospective evaluation is not significantly superior to retrospective evaluation for this particular dataset, it is useful because all the market information has been incorporated in this model and because it did protect producers from adverse price movements.Agricultural Finance, Livestock Production/Industries,

THE WELFARE EFFECTS OF BANNING TOURNAMENTS WHEN COMMITMENT IS IMPOSSIBLE: SOME RESULTS FROM THE BROILER SECTOR

We consider the implications of banning tournament contracts and replacing them with fixed performance standard contracts in a multi-period model where the principal cannot commit to future contract parameters. A ban cannot increase total surplus in a static model. In a dynamic model, however, a ban of tournaments can increase total surplus by mitigating the ratchet effect. Calibrating our model to published data from the broiler sector, we find that a ban on use of contemporaneous and lagged relative performance data does not improve total surplus under most circumstances but could increase total surplus in a few instances of low wealth and unitary relative risk aversion. A more enforceable, period-by-period ban is even less likely to be welfare enhancing and does not hinder the principal from redistributing a fixed compensation pool from low ability growers to high ability growers.Livestock Production/Industries,

TOURNAMENTS, RISK PERCEPTIONS, AND FAIRNESS

This paper reports the results of an economic experiment investigating human subjects' preferences for two types of contracts tournaments and fixed performance standard contracts. Willingness to pay data was elicited through an auction and results suggest that subjects prefer fixed performance standard contracts to tournaments. Primary drivers of this result appear to be subjects' perceptions that tournaments are more risky and less fair than fixed performance standard contracts. Surprisingly, measures of the relative profitability of the contracts did not correlate with willingness to pay. Our results can shed light on why agricultural producers express frustration over tournaments and can provide insights on contract and policy design.Research Methods/ Statistical Methods,

AJAE Appendix: Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

The material contained herein is supplementary to the article named in the title and published in the American Journal of Agricultural Economics, May 2007, Volume 89, Issue 2.Marketing,

THE ECONOMICS OF LABELING: AN OVERVIEW OF ISSUES FOR HEALTH AND ENVIRONMENTAL DISCLOSURE

During the last two decades, product labeling has become an increasingly used policy tool, particularly with respect to the provision of health and environmental information. Theory holds that the flow of information among market participants plays a critical role in the efficient operation of markets. This paper explores the role of product labeling policy in ameliorating two potential market deficiencies: asymmetric information and costly search behavior. Practical considerations for the design and implementation of labeling policy and of labeling research are explored.Agribusiness,

Social Preferences and Relational Contracting: An Experimental Investigation

The form and regulation of contracts is of increasing importance to agricultural economists as farmers and agribusinesses increasing rely on contracts rather than markets to acquire inputs and sell outputs. We focus on the differences between the joint and individual surplus achievable under complete versus incomplete or relational contracts, where the latter are contracts that are not verifiable by a third party and must rely upon threat of termination in order to entice mutually satisfactory performance. Using an experimental market similar to Brown, Falk, and Fehr [Brown, M., A. Falk, and E. Fehr. Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] we replicate the general results found by these authors, including the qualitative findings that complete contracts dominate incomplete contracts in terms of social surplus generated and that incomplete contracts significantly deviate from the minimal levels of social surplus predicted by equilibrium models featuring purely self-interested agents. We extend the Brown, Falk, and Fehr results in a fundamental way: we explicitly link individual outcomes in relational contracts (e.g, surplus, prices, quality) to the nature of subjects' social preferences, which were measured by a separate experimental protocol that was implemented prior to the experimental trading session. We find subjects with other-regarding preferences enter into relational contracts that generate levels of social surplus similar to the surplus generated under complete contracts. Furthermore, subjects with other-regarding preferences tend to locate others with similar preferences and enter into long-term trading relationships that generate these higher surplus levels. We discuss the ramifications of the results for current regulatory efforts aimed at agricultural contracts.Marketing,