Should We Expect Government Policy to Be Pareto Efficient?: The Consequences of an Arrow-Debreu Economy with Violable Property Rights

To address the question, "Should we expect government policy to be efficient?" at its roots, I modify the well-known Arrow-Debreu private ownership economy, allowing property rights to be violable. The result is that equilibria tend to be Pareto inefficient.Pareto efficiency, property rights, Research Methods/ Statistical Methods, D72, D78,

A New Measure of the Producer Welfare Effects of Technological Change

It is well recognized that the statistical reliability of the conventional method of estimating the effects of technological change on producer welfare is often quite poor. I present a method that enhances the statistical reliability of such estimates. I emphasize that when measuring the welfare effects of technological change, valuable information can be gleaned from data on input prices and quantities. This type of data is often available, but the conventional measure typically does not take full advantage of its availability. Letting T0 be some initial level of technology and T1 be a subsequent level, the conventional measure of producer welfare change due to a technology change is the change in the “triangle” area under the price and behind the supply curve. The change in welfare is measured as the difference in the producer surpluses under the two (price, technology) scenarios. Attempts to this measure to gauge the producer welfare effects of changes in technology date back to Griliches’s (1957, 1958) studies of the economics of hybrid corn technology. Since then, scores of articles have reported estimates of the costs and returns of research and resultant technology change. The conventional method of estimation of the producer welfare effects of a technology change is burdened by a well-recognized difficulty: the method usually requires extrapolation of the econometric estimation of the supply function to regions outside the range the data (Scobie 1976; Lindner and Jarett 1978; Rose 1980; Voon and Edwards 1991). There is a large and involved literature discussing how supply should be assumed to shift, whether in a parallel, pivotal, or some other fashion. Strong critiques about the dependence of producer welfare measures on assumptions about supply shifts have appeared in the literature. The assumed functional form of the supply curve is of ultimate importance in the conventional measure of producer welfare change. It easily may be the case that an assumed functional form fits the data well locally, i.e., in its range, and therefore passes all goodness-of-fit statistical tests, but that the estimate is poor globally. If the global fit is poor, then the estimate using the conventional measure of welfare change is likely to be poor. In the following, I derive and discuss a new measure of the change in producer welfare due to technology change. The measure does not generally require estimation of the supply curve far beyond the range of the data, and therefore when using this new measure, increased statistical confidence can be placed on the estimation of the change in producer welfare. The key to the new method is to use data from input markets in the measurement of producer welfare change. Since a supply curve reflects marginal costs of production, it is natural to take advantage of available data by estimating input costs in input markets, instead of ignoring input market data and attempting to measure input costs in the output market. By making use of input market data, the new measure can help solve this problem. The new measure finds cost changes not by integrating behind supply curves, but rather by examining “rectangles” associated with input demand curves and output supply curves. The bases of such rectangles require estimation of “K-shifts” in input demand and output supply. In the conventional method, only the K-shift in output supply need be estimated. But, if data from input markets is available, and reasonable estimates of the input demand shifts are obtainable, the new measure can ameliorate the statistical unreliability endemic in the conventional measure’s literature. To demonstrate potential benefits of the new measure of producer welfare change I present results from a Monte Carlo simulation. At the beginning of each Monte Carlo run, one hundred “firms” were created by drawing values of the production coefficient vectors b1, … , b100. This defined one hundred production functions, firm input demand functions, and firm supply functions. In each run, market prices and quantities were determined in two equilibria, each under a different level of technology. Each run created a simulated “data set” with forty observations. Taking on the role of a researcher having access to the run’s data set, but not knowing the true model that generated it, I assumed the linear functional forms for supplies and demands, and estimated the coefficients. Then I measured the true change in profits and the estimated change in profits caused by the technological change, first by using the model’s true supply and demand functions, and then using its estimated supply and demand functions. Both the conventional measure and the new measure were used, and then the differences between the true change in profits and the estimated change in profits were calculated for both measures, in order to compare the statistical reliability of each. In every Monte Carlo run, as expected, when the true supply and demand functions were used, the change of profits was calculated exactly using the conventional measure or the new measure. But when the estimated functions were used, the mistaken assumptions about global functional form caused much smaller errors in estimation when the new measure was used than when the traditional measure was used. The (true) baseline profits for the first Monte Carlo run can be calculated directly or as a change in producer surplus as measured behind the baseline true supply curves, or by using the new measure with the true curves. As expected, the statistical reliability of the new measure was shown to be much greater than the statistical reliability of the conventional measure.technological change, producer welfare, applied welfare economics, Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods, O30, O33,

A NOTE ON THE EFFICIENCY OF INCOME REDISTRIBUTION WITH SIMPLE AND COMBINED POLICIES

Recent studies have investigated the efficiencies of policies that use several policy instruments simultaneously (for example, a policy that uses a production subsidy combined with a production quota). Several studies of very specific cases find that optimal combination of two policy instruments is more efficient than optimal independent use of either. In this note we demonstrate using set theory and maximization theory, that all such specific results are examples of a more general result, which is that by combining m instruments efficiently, a government can always be at least as efficient as when using a subset of those m instruments. This result holds for any of the several definitions of "efficiency" in the literature.Agricultural and Food Policy,

On Measuring the Value of a Nonmarket Good Using Market Data

Our purpose is to present in detail numerical methods of measuring the value of nonmarket goods using market data, under either weak neutrality, weak complementarity, or any other preference restriction meeting the requirements discussed in this paper. It has been claimed in a number of places in the literature that numerical methods cannot be used to measure the value of nonmarket goods unless the very restrictive Willig conditions are satisfied. We show that this claim is mistaken, and that numerical methods can be used whether or not the Willig conditions are satisfied. Our numerical methods are more flexible than the existing analytical method because ours can be used with any Marshallian demand system.Resource /Energy Economics and Policy,

GOVERNMENT VS. ANARCHY: MODELING THE EVOLUTION OF INSTITUTIONS

This paper gives a general mathematical definition of an institution, and presents an explicit formal method by which to incorporate institutions in a standard general equilibrium model. We illustrate our concept using a modified Prisoner's dilemma game in which property rights over natural resources emerge from an anarchy-like state of nature. Two players decide voluntarily and non-cooperatively whether to give up some fraction of their personal resource to set up an enforcement mechanism that punishes defecting players (i.e., players that do not opt to cooperate). This enforcement mechanism constitutes a credible threat, and is central to the establishment of bilateral cooperation (i.e, government). We highlight the importance of imperfect information (proposition 1) and risk averse behavior (propositions 2 and 3) for bilateral cooperation to be sustained as the unique Nash-equilibrium. Proposition 1 formalizes an idea of Brennan and Buchanan (1985) that the legitimacy of governments is based on their contribution to reducing uncertainty. Proposition 3 justifies an assumption made by Sened (1997) that rational individuals respect governments dictating specific institutions.Institutions, Imperfect Information, Property Rights, Decision Making, Social Games, Institutional and Behavioral Economics, Teaching/Communication/Extension/Profession, C72, D7, D81,

THE SIZE OF THE PRIZE: TESTING RENT-DISSIPATION WHEN TRANSFER QUANTITY IS ENDOGENOUS

We present a transfer-seeking model of political economy in which the size of the transfer is determined endogenously, and in which over-dissipation of rents is predicted even under conditions of risk-neutrality and perfect rationality. We implement an empirical test of this model by collecting behavioral data in a laboratory experiment. We confirm the existence of behavior that leads to over-dissipation of rents in games with both symmetric and asymmetric political power. We also confirm the hypotheses that lowering the political power of one player can lead to smaller rent-seeking expenditures and to larger transfers. We observe behavior that deviates from dominant strategies.Political Economy,

Using Spatial Analysis to Study the Values of Variable Rate Technology and Information

We present a review of the last few years' literature on the economic feasibility of variable rate technology in agriculture. Much of the research on this topic has involved the estimation of site-specific yield response functions. Data used for such estimations most often inherently lend themselves to spatial analysis. We discuss the different types of spatial analyses that may be appropriate in estimating various types yield response functions. Then, we present a taxonomy for the discussion of the economics of precision agriculture technology and information. We argue that precision agriculture technology and information must be studied together since they are by nature economic complements. We contend that longer-term, multi-location agronomic experiments are needed for the estimation of ex ante optimal variable input rates and the expected profitability of variable rate technology and information gathering. We use our taxonomy to review the literature and its results with consistency and rigor.precision agriculture, spatial econometrics, variable rate technology, Research and Development/Tech Change/Emerging Technologies, C31, O33, Q16,

Measuring producer welfare under output price uncertainty and risk non-neutrality

Procedures to measure the producer welfare effects of changes in an output price distribution under uncertainty are reviewed. Theory and numerical integration methods are combined to show how for any form of Marshallian risk-responsive supply, compensating variation of a change in higher moments of an output price distribution can be derived numerically. The numerical procedure enables measurement of producer welfare effects in the many circumstances in which risk and uncertainty are important elements. The practical ease and potential usefulness of the procedure is illustrated by measuring the producer welfare effects of USA rice policy.price uncertainty, risk non-neutrality, welfare economics, Demand and Price Analysis, Risk and Uncertainty,

THE ECONOMICS OF NON-GMO SEGREGATION AND IDENTITY PRESERVATION

We survey grain and soybean handlers and producers in the U.S. and EU to estimate costs of preserving the identities of GMO and non-GMO crops in marketing channels. We introduce our estimates into the IFPRI IMPACT model to simulate the effects of identity preservation on farm incomes and consumer well-being.Research and Development/Tech Change/Emerging Technologies,

TOWARDS MEASURING PRODUCER WELFARE UNDER OUTPUT PRICE UNCERTAINTY AND RISK NON-NEUTRALITY

We combine theory with numerical integration methods to show that for any form of uncompensated supply, compensating variation of a change in higher moments of an output price distribution can be numerically derived.Producer welfare, price uncertainty, risk, Demand and Price Analysis, Research Methods/ Statistical Methods, Risk and Uncertainty,