Technological and financial approaches to risk management in agriculture: an integrated approach*

In the present paper, risk‐management problems where farmers manage risk both through production decisions and through the use of market‐based and informal risk‐management mechanisms are considered. It is shown that many of these problems share a common structure, and that a unified and informative treatment of a broad spectrum of risk‐management tools is possible within a cost‐minimisation framework, under minimal conditions on their objective functions. Fundamental results are derived that apply regardless of the producer's preference towards risks, using only the no‐arbitrage condition that agricultural producers never forego any opportunity to lower costs without lowering returns.     

A Technological and Organisational Explanation for the Size Distribution of Firms

This paper combines insights from the literature on the economics of organisation with traditional models of market structure to construct a theory of equilibrium firm size heterogeneity under the assumption of a homogenous product industry. It is possible that configurations consisting entirely of small firms (run by entrepreneurs with limited attention) and with larger firms (using managerial techniques to substitute away these limits to allow increasing returns technologies to become profitable) can arise in equilibrium. However, there also exist equilibrium configurations with the co-existence of large and small firms. The efficiency properties of these respective equilibria are discussed. Finally, the implications of an expanding market size are considered.     

Information value and efficiency measurement for risk-averse firms

This paper has three goals. First, we demonstrate that standard arguments and methods from production and duality analysis can be used to provide a comprehensive and general treatment of the value of information for a risk-averse firm with expected-utility (linear-in-probabilities) preferences and a general stochastic technology. Second, we place bounds on the value of information for a risk-averse firm and relate these bounds to characteristics of the technology and the producer’s preferences. The third and final goal is to derive the implications that information differences can have for measured efficiency differences and to relate the bounds on the value of information to those measured differences.      

THEORIES OF CHOICE UNDER IGNORANCE AND UNCERTAINTY

Abstract. In this paper, Knight's distinction between risk and uncertainty, and its significance for economic analysis are examined. The paper consists of a survey of some recent developments on the theory of choice under uncertainty and some applications of these theories to problems for which Bayesian Decision Theory has not proved entirely satisfactory. Two problems are examined in detail. The first is that of finance and insurance and the second is that of risktaking behaviour with special emphasis on lotteries.     

State‐contingent analysis of farmers’ response to weather variability: irrigated dairy farming in the Murray Valley,Australia

The agricultural sector is commonly regarded as one of the most vulnerable to climate change. Current understanding of the impact of climate change on this sector relies on the underlying assumptions about farmers’ possible responses to weather variability, including changes in crop choice, input combinations and land management practices. Many previous analyses rely on the implicit (and restrictive) assumption that farmers operate under a fixed technology set across different states of nature. This assumption, represented through stochastic production or profit functions, is commonly made but seldom tested and may understate farmers’ responses to climate change if state‐contingent production technologies are, in reality, more flexible. The potential for farmers to adapt production technologies in response to unforeseen events is at the core of the state‐contingent approach. Advanced in Chambers and Quiggin (2000), the theory contends that producers can manage uncertainty through the allocation of productive inputs to different states of nature. In this article, we test the assumption that farmers’ observed behaviour is consistent with the state‐contingent production theory using farm‐level data from Australia. More precisely, we estimate the milk production technology for a sample of irrigated dairy farms from the southern Murray–Darling Basin over the period from 2006–2007 to 2009–2010.     

Agriculture and global climate stabilization: a public good analysis

The stabilization of global climate presents one of the most complex problems in public good provision the world has faced. Continuation of “business as usual” policies, leading to warming of more than 2 degrees over the next year, will produce significant damage to agricultural systems and catastrophic damage to the natural ecosystems that ultimately support agriculture. The best solution to the public goods problem is a “contract and converge” agreement in which the ultimate outcome is a common global entitlement to CO₂ emissions per person.     

The Economics of Farm Fragmentation: Evidence from Ghana and Rwanda

Farm fragmentation, in which a household operates more thanone separate parcel of land, is a common phenomenon in Sub-SaharanAfrica. Concerned by the perceived costs of fragmented as opposedto consolidated holdings, several countries have implementedland consolidation programs. But these interventions overlookthe benefits that land fragmentation can offer farmers in managingrisk, in overcoming seasonal labor bottlenecks, and in bettermatching soil types with necessary food crops. This articleuses household data from Ghana and Rwanda to discuss the incidenceand causes of fragmentation. It then formally tests the relationbetween fragmentation and land productivity and risk reduction.The conclusion is that consolidation programs are unlikely tolead to significant increases in land productivity and may actuallymake farmers worse off. Policymakers should focus instead onreducing the root causes of fragmentation: inefficiencies inland, labor, credit, and food markets.     

Repurchase of renewal rights: a policy option for the National Water Initiative*

Management of the Murray–Darling river system involves a large number of users with imprecisely defined rights, and an aggregate rate of resource use that is environmentally unsustainable. One possible policy response is to make formal or informal contracts with users, under which users receive current benefits in return for a commitment to forgo usage rights in future. In this paper, this issue is explored with specific reference to the possibility of repurchasing the renewal rights for irrigation licenses.