The Theory of Commodity Price Stabilization Rules: Welfare Impacts and Supply Responses

It is the aim of this paper to suggest an alternative framework for the analysis of commodity stabilisation schemes, based on more secure micro-economic foundations. We begin with what might be termed the general theory of partial (or incomplete) price stabilisation. This meets objection (vi) above, and shows how the shape of the demand schedule and the source and specification of risk influence the size and distribution of welfare gains. It therefore allows the reader to appreciate the importance of the more detailed model specification which is required to investigate the remaining questions. This new model allows one to distinguish between the short run and long run impact of stabilisation, and to examine the importance of risk aversion and individual supply elasticity on the distribution of gains and losses from partial stabilisation. In particular, we do not discuss the dynamics of price stabilisation in the paper (price expectations, learning, the stochastic nature of buffer stocks, etc.), nor do we model demand uncertainty, the macro-economic impact of risk and stabilisation, market imperfections, interactions with future markets, private speculators, with other commodities, and a host of other important issues. For these, and for a more detailed exposition of some of the key concepts presented here, the interested reader is referred to our forthcoming book (Newbery and Stiglitz, 1980). Finally, we should point out that the buffer stock rules analysed here are not optimal rules, which can only be derived from complete dynamic analysis, as derived and discussed in the book 1 Turnovsky (1978a) examines a simple parameterisation of a partial stabilisation scheme, but restricts the analysis to the linear Waugh-Oi-Massell case

Risk Aversion, Supply Response, and the Optimality of Random Prices: A Diagrammatic Analysis

This paper analyzes the effect of commodity price stabilization on producers and consumers, both in the short run, and in the long run, when producers have adjusted their production decisions to take account of the change in the price distribution. We derive conditions under which (a) both producers and consumers may be better off; and (b) both producers and consumers may be worse off. Moreover, we show that the long-run effects may differ not only quantitatively but also qualitatively from the short-run effects. The anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers

The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations

This paper shows that, in the absence of a complete set of risk markets, prices provide incorrect signals for guiding production decisions. Even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period, the market allocation is, in general, not a constrained Pareto optimum. Essentially the only conditions under which, for all technologies, the market equilibrium is a constrained Pareto optimum are those in which risk markets are redundant. We derive the necessary and sufficient conditions for redundancy of risk markets, which turn out to be extremely restrictive

Optimal Commodity Stockpiling Rules

Stiglitz and Newbery discuss optimal commodity stockpiling rules

Wage Rigidity, Implicit Contracts, Unemployment, and Economic Efficiency

This article examines the theory of involuntary unemployment and implicit contracts. Furthermore, the article is concerned with identifying the circumstances under which implicit contracts will give rise to unemployment even though involuntary unemployment has been often attributed to wage rigidities generated by implicit contracts by themselves. Moreover, a simple, general equilibrium model and the three sources of restrictions on the set of feasible contracts: (1) information; (2) enforcement; and (3) complexity. Finally, it is concluded that implicit contracts can then provide an explanation of unemployment

Open Government Data: A Focus on Key Economic and Organizational Drivers

Grounding the analysis on multidisciplinary literature on the topic, the existing EU legislation and relevant examples, this working paper aims at highlighting some key economic and organizational aspects of the "Open Government Data" paradigm and its drivers and implications within and outside Public Administrations. The discussion intends to adopt an "Internet Science" perspective, taking into account as enabling factors the digital environment itself, as well as specific models and tools. More "traditional" and mature markets grounded on Public Sector Information are also considered, in order to indirectly detect the main differences with respect to the aforementioned paradig