Policy Design as an Irreversible Investment Under Uncertainty: Norwegian Agriculture and the WTO

This paper is concerned with the timing of an agricultural policy reform under uncertainty. The focus is on the opportunity cost of giving up the option to wait when implementing a policy reform. Including the option value in applied policy analysis can help explain why conventional analyses may find observed policies to be Pareto-inferior. Furthermore, it explains why otherwise profitable policy reforms may be delayed. The theoretical model is applied to Norwegian agricultural policy anticipating a prospective WTO agreement. It is argued that the option value should be incorporated into applied policy analysis when high uncertainty prevails.Option value, Policy reform, WTO, Norway, Uncertainty, International Relations/Trade, C61, D78,

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,

Modellbasert analyse av en forenkling av virkemiddelsystemet for norsk jordbruk

I denne studien analyseres effekten av en forenkling av de økonomiske virkemidlene i jordbrukspolitikken slik det er skissert av det såkalte «Forenklingsutvalget». Utredningens hovedvekt ligger på en potensiell omfordelingseffekt mellom bruk, produksjoner og regioner. Utvalgets såkalte «Revolusjonsalternativ» ligger til grunn for utredningen. Alternativet innebærer et sterkt redusert antall ordninger og endring i satser og utbetalingsregler for de igjen værende ordningene. Analysen er utført for enkeltbruk med PT-modellen og på sektornivå med Jordmod. Modellresultatene tyder samlet sett på en begrenset omfordelingseffekt av forenklingsforslaget på kort sikt og en noe større effekt på lang sikt. Gitt dagens bruksstruktur (PT-modellen) tyder analysen på en mindre omfordeling av budsjettstøtte fra distrikter til sentrale strøk og fra kraftfôrbasert husdyrproduksjon til grovfôrbasert husdyrhold..

THE ROLE AND IMPORTANCE OF ACADEMIC FREEDOM IN THE POLICY PROCESS

Academic freedom, Policy process, policy decision-making, policy advice, research, research institute, Political Economy, Teaching/Communication/Extension/Profession,

The Economics of Delaying Policy Change: An Application to the 1992 CAP Reform

Positive political economy is usually concerned with economic explanations of observed policy choices, while the timing of a policy reform has not gained similar attention. This is somewhat surprising since policy makers most often are free to decide both the design and timing of a policy reform. Drawing on insights from recent developments in the finance literature on investment under uncertainty, here we apply the idea of option value to the analysis of government policy making. Common political-economic explanations of the 1992 CAP reform are that policymakers felt domestic political pressure to make the CAP more efficient, and also international political pressure and to bring the CAP in line with treaty obligations. Although these arguments are sound, they fail to explain why policy-makers did not enact the reform earlier, especially during times of decreasing world market prices prior to 1992. We address this question using the theory of option value, which is the value of being able to wait in decisionmaking. Commonly governments are free to decide when to reform policy. Waiting to reform policy can improve government decisions. For while waiting decision-makers may observe market parameter changes as they occur. (For example, they may obtain better information about changes in world prices.) This reduces their uncertainty about the effects of their decisions. Giving up the option to wait incurs a cost which has to be taken into account in policy decisions. We illustrate the option value concept using a political-economy model of the 1992 CAP reform. We show empirically that if decision-makers had not had the option to wait to reform policy, it would have been more efficient to implement the 1992 CAP reform in the mid 1980s.Agricultural and Food Policy,

Towards a Theory of Policy Making

The paper presents a theory of policy timing that relies on uncertainty and transaction costs to explain the optimal timing and length of policy reforms. Delaying reforms resolves some uncertainty by gaining valuable information and saves transaction costs. Implementing reforms without waiting increases welfare by adjusting domestic policies to changed market parameters. Optimal policy timing is found by balancing the trade-off between delaying reforms and implementing reforms without waiting. Our theory offers an explanation of why countries differ with respect to the length of their policy reforms, and why applied studies often judge agricultural policies to be inefficient.Policy analysis, Uncertainty, Dynamic model, Transaction costs, Agricultural and Food Policy,

The importance of climate and policy uncertainty in Norwegian agriculture

The paper addresses future climate and policy uncertainty for agricultural production and food security in Norway. The two crop simulation models, CSM-CERES-Wheat and, the LINGRA model, were used to determine the impact of climate change on grain yield of spring wheat, and harvest security and biomass yield of timothy, an important forage grass in Northern Europe, respectively. Harvestable yield distributions from the crop models were fed into a stochastic version of the economic sector model Jordmod. Distributions of the rates of agricultural subsidies rates were assessed based on past policy changes and prospective reforms. The model was used to assess the effects of both climate and policy uncertainty on agricultural production, land use, and national food security. Jordmod is comprised of a supply module in which stochastic profits for more than 300 regional farms are maximized and a deterministic market module which maximizes social welfare in the agricultural sector. Socio-economic scenarios were developed around the level of ambition of Norwegian agricultural policy makers. The model results were contrasted with the deterministic results based on average yield and payment rates. The innovation of this paper lays in assessing the combined effects of future climate and policy uncertainty for the agricultural sector in Norway. It also highlights the potential errors made by neglecting these types of uncertainty in economic modelling

Konsekvensvurdering av økt stimulans til kjøttkvalitet og beiting i grovfôrbasert husdyrproduksjon

Klima- og miljødepartementet (KLD) har bedt NIBIO om å se nærmere på effekter av større insentiver til beiting og kjøttkvalitet i grovfôrbasert husdyrproduksjon. Til dette formål har KLD definert fire tiltak (jf tabell 1).publishedVersio

Potensielle effekter for jordbruket av partiers partiprogrammer foran Stortingsvalget 2009. En analyse basert på Jordmod

publishedVersio