The empirical relevance of the competitive storage model

The empirical relevance of models of competitive storage arbitrage in explaining commodity price behavior has been seriously challenged in a series of pathbreaking papers by [Deaton and Laroque, 1992], [Deaton and Laroque, 1995] and [Deaton and Laroque, 1996]. Here we address their major criticism, that the model is in general unable to explain the degree of serial correlation observed in the prices of twelve major commodities. First, we present a simple numerical version of their model which, contrary to Deaton and Laroque (1992), can generate the high levels of serial correlation observed in commodity prices, if it is parameterized to generate realistic levels of price variation. Then, after estimating the [Deaton and Laroque, 1995] and [Deaton and Laroque, 1996] model using their data set, model specification and econometric approach, we show that the use of a much finer grid to approximate the equilibrium price function yields quite different estimates for most commodities. Results are obtained for coffee, copper, jute, maize, palm oil, sugar and tin that support the specifications of the storage model with positive constant marginal storage cost and no deterioration as in Gustafson (1958a). Consumption demand has a low response to price and, except for sugar, stockouts are infrequent. The observed magnitudes of serial correlation of price match those implied by the estimated model.     

A test of the rational expectations hypothesis using data from a natural experiment

Data on contestants’ choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. This separate identification is possible by virtue of the fact that, at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the ‘true’ offer function which is estimated extraneously using data on offers actually made to contestants. We find a close correspondence, leading us to accept the rational expectations hypothesis. The importance of belief formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward looking as opposed to myopic.     

Principal components at work: the empirical analysis of monetary policy with large data sets

The empirical analysis of monetary policy requires the construction of instruments for future expected inflation. Dynamic factor models have been applied rather successfully to inflation forecasting. In fact, two competing methods have recently been developed to estimate large‐scale dynamic factor models based, respectively, on static and dynamic principal components. This paper combines the econometric literature on dynamic principal components and the empirical analysis of monetary policy. We assess the two competing methods for extracting factors on the basis of their success in instrumenting future expected inflation in the empirical analysis of monetary policy. We use two large data sets of macroeconomic variables for the USA and for the Euro area. Our results show that estimated factors do provide a useful parsimonious summary of the information used in designing monetary policy. Copyright © 2005 John Wiley & Sons, Ltd.     

Regional Insurance and Migration

A dynamic model of migration is developed to study whether labor mobility can hedge people against region-specific shocks, making private or public insurance redundant. The model adopts a novel timing for migration, which is argued to be the time frame suitable for analyzing risk-sharing issues. It also innovates on the existing literature by solving individual migration through convexification of the set of actions. The results show that the role of migration as an insurance mechanism is small: labor mobility cannot fully remove income differentials between regions. It is also shown that a fiscal stabilization scheme is, in general, optimal; moreover, any pure risk-sharing mechanism has no influence on migration flows.     

Choosing project risk management techniques. A theoretical framework

The pressure for increasing quality while reducing time and costs places particular emphasis on managing risk in projects. To this end, several models and techniques have been developed in literature and applied in practice, so that there is a strong need for clarifying when and how each of them should be used. At the same time, knowledge about risk management is becoming a matter of paramount importance to effectively deal with the complexity of projects. However, communication and knowledge creation are not easy tasks, especially when dealing with uncertainty, because decision-making is often fragmented and a comprehensive perspective on the goals, opportunities and threats of a project is missing. With the purpose of providing guidelines for the selection of risk techniques taking into account the most relevant aspects characterising the managerial and operational scenario of a project, a theoretical framework to classify these techniques is proposed. Based on a literature review of the criteria to categorise risk techniques, three dimensions are defined: the phase of the risk management process, the phase of the project life cycle and the corporate maturity towards risk. The taxonomy is then applied to a wide selection of risk techniques according to their documented applications. This work helps to integrate the risk management and the knowledge management processes. Future research efforts will be directed towards refining the framework and testing it in multiple industries.     

Investment decisions,net present value and bounded rationality

The Net Present Value maximizing model has a respectable ancestry and is considered by most scholars to be a theoretically sound decision model. In real-life applications, decision makers use the NPV rule, but apply a subjectively determined hurdle rate, as opposed to the ‘correct’ opportunity cost of capital. According to a heuristics-and-biases-program approach, this implies that the hurdle-rate rule is a biased heuristic. This work shows that the hurdle-rate rule may be interpreted as a fruitful strategy of bounded rationality, where several domain-specific and project-specific elements are integrated and condensed into an aspiration level. The paper also addresses the issue of a productive cooperation between bounded and unbounded rationality.     

Does market competitiveness significantly affect public intervention in agricultural insurance: the case in Italy

Analyses of agricultural insurance failures often assume the existence of competitive supply, tracing the reasons for high insurance cost and limited farmer participation to informational problems, and suggesting the need for premium subsidization in order to increase participation. However, in countries such as Spain and Italy, where agricultural insurance is most highly subsidized, it could be that supply is not fully competitive. In this article, we explore the incidence of public subsidies to agricultural insurance premia when supply is noncompetitive. Through the use of a simple empirical model of an insurance market, it is shown that, while in the case of a competitive supply, subsidies to insurance would benefit farmers, a monopolistic supply would capture most of the subsidy, thus eliminating the potential incentive towards wider participation by farmers. The model is applied to a panel of Italian farms for different levels of risk aversion to demonstrate the limited effect that a subsidy to a hypothetical all risk yield insurance would have on farmer participation in the case of monopolistic supply.     

Access regulation and the transition from copper to fiber networks in telecoms

In this paper we study the impact of different forms of access obligations on firms’ incentives to migrate from the legacy copper network to next generation broadband infrastructures. We analyze geographically differential access prices of copper (that depend on whether or not an alternative fiber network has been deployed in the area) and ex-ante access obligations for fiber networks. We discuss how these regulatory schemes fare in addressing the tension among different objectives, such as the promotion of static efficiency, fostering investments in new infrastructures, and avoiding unnecessary duplication of (fiber) networks.