Representing climatic uncertainty in agricultural models – an application of state‐contingent theory

The state‐contingent approach to production uncertainty presents a more general model than the conventional stochastic production approach. Here we investigate whether the state‐contingent approach offers a tractable framework for representing climatic uncertainty at a farm level. We developed a discrete stochastic programming (DSP) model of a representative wheat–sheep (mixed) farm in the Central West of NSW. More explicit recognition of climatic states, and associated state‐contingent responses, led to optimal farm plans that were more profitable on average and less prone to the effects of variations in climate than comparable farm plans based on the expected value framework. The solutions from the DSP model also appeared to more closely resemble farm land use than the equivalent expected value model using the same data. We conclude that there are benefits of adopting a state‐contingent view of uncertainty, giving support to its more widespread application to other problems.     

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.     

Drought policy: a graphical analysis*

The standard approach to modelling production under uncertainty has relied on the concept of the stochastic production function. In the present paper, it is argued that a state‐contingent production model is more flexible and realistic. The model is applied to the problem of drought policy.     

Valuing seasonal climate forecasts in a state‐contingent manner

We applied state‐contingent theory to climate uncertainty at a farm level to assess the value of seasonal climate forecasts in the Central West region of NSW. We find that modelling uncertainty in a state‐contingent manner results in a lower estimate of forecast value than the typical expected value approach. We attribute this finding to a more conservative long‐term farm plan in the discrete stochastic programming (DSP) model, which is better balanced for climate uncertainty. Hence, a climate forecast, even though it still revises probabilities held by farmers, does not call forth such large changes in farm plans and associated farm incomes. We then use the DSP model to assess how attributes of a hypothetical forecasting system, particularly its skill and timeliness, as well as attributes of the decision environment, influence its value. Lastly, we assess the value of current operational forecast systems and show that the value derived from seasonal climate forecasts is relatively limited in the case study region largely because of low skill embodied in forecasts at the time when major farm decisions are being made.     

Efficiency analysis under uncertainty: a simulation study

We model production technology in a state‐contingent framework assuming that the firms maximise ex ante their preference function subject to stochastic technology constraint; in other words, firms are assumed to act rationally. We show that rational producers who face the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk‐neutral probabilities, efficiency scores and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate noiseless data based on our state‐contingent specification of technology. Our state‐contingent estimator recovers technology parameters and other economic quantities of interest without any error. But, when we apply conventional efficiency estimators to the simulated data, we obtain biased estimates of technical efficiency.     

Production economics in the presence of risk*

This paper provides an overview of the literature on production under the influence of risk. Various specifications of stochastic production function such as models with additive and multiplicative uncertainty, Just and Pope model, output‐cubical, state‐allocable and state‐general models are discussed. Further, criteria determining optimal producer behaviour are derived for deterministic production technology and for various kinds of state‐contingent technologies such as output‐cubical, state‐specific, state‐allocable and state‐general technologies. Finally, a brief discussion is presented about the drawbacks of each of these specifications of technology.     

Water rights for variable supplies*

The relative merits of different systems of property rights to allocate water among different extractive uses are evaluated for the case where variability of supply is important. Three systems of property rights are considered. In the first, variable supply is dealt with through the use of water entitlements defined as shares of the total quantity available. In the second, there are two types of water entitlements, one for water with a high security of supply and the other a lower security right for the residual supply. The third is a system of entitlements specified as state‐contingent claims. With zero transaction costs, all systems are efficient. In the realistic situation where transaction costs matter, the system based on state‐contingent claims is globally optimal, and the system with high‐security and lower security entitlements is preferable to the system with share entitlements.     

Land Registration and Gender Equality in Ethiopia: How State–Society Relations Influence the Enforcement of Institutional Change

In recent years, the Ethiopian government has introduced reforms to promote gender equality in land rights, including legislative changes and a land registration programme that requires the names of both husbands and wives on certificates. This paper examines implementation of these reforms through a case‐based approach that links national policy processes to analysis of two village‐level case studies, based on fieldwork conducted in 2009–10. In both cases, government initiatives do appear to have enhanced women's land rights to a certain degree. However, the causal process involved is considerably more complex than the direct link between titling and women's land rights that is assumed in much of the existing literature. The cases suggest that government initiatives are contingent upon state–society relations, and that change to informal institutions and power relations within society can constitute an important complement to land registration.     

Firm behaviour under uncertainty: a simple parametric model

In this paper, we model production technology in a state‐contingent framework. We assume that all the firms use the same stochastic technology, but they may have different risk attitudes and information sets, and ex post they may operate in different production environments. Firms maximise ex ante their preference function subject to a stochastic technology constraint; in other words, they are assumed to act rationally, thereby leaving no room for either technical or allocative inefficiency. We provide a simple parametric functional form to represent the state‐contingent technology. Using simple numerical examples, we illustrate how optimal input–output choices are dramatically affected when firms have different preferences and information sets. Thus, we show that the observed disparateness of production choices among different firms can actually be attributed to the stochastic nature of the decision environment.     

Peasants,bandits, and state intervention: The consolidation of authority in the Ottoman Balkans and Southern Italy

This paper explores the role of bandits and state intervention in the Ottoman Balkans and Southern Italy in the 19th century by using archival documents. I argue that the states may react similarly and radically when their authority is challenged in the periphery. The Ottoman Empire and the Kingdom of Italy developed the same forms of state intervention to fight against the bandits, even though these two states had fundamentally different political, cultural, and socio‐legal structures. I present three different forms of state intervention: (i) victim‐centred state intervention; (ii) security‐centred state intervention; and (iii) authority‐centred state intervention. These three forms consolidated the state's authority while making the two states both fragile and dependent on other social agencies in the long term. I further claim that consolidation of the state's authority manifests the paradox of state intervention and creates more vulnerabilities in traumatic geographies.     

Event‐specific data envelopment models and efficiency analysis*

Most, if not all, production technologies are stochastic. This article demonstrates how data envelopment analysis (DEA) methods can be adapted to accommodate stochastic elements in a state‐contingent setting. Specifically, we show how observations on a random input, not under the control of the producer and not known at the time that variable input decisions are made, can be used to partition the state space in a fashion that permits DEA models to approximate an event‐specific production technology. The approach proposed in this article uses observed data on random inputs and is easy to implement. After developing the event‐specific DEA representation, we apply it to a data set for Western Australian barley production data. Our results highlight the need for acknowledging stochastic elements in efficiency analysis.     

Pricing a rural development program: uncertainty,indifference, and protest behaviors

This article presents an econometric approach to modeling uncertainty, unwillingness to pay, and protest behavior in contingent valuation studies. For that purpose, a mixture model with sample selection is developed for a multiple‐bounded uncertainty elicitation format. The proposed theoretical framework is applied to evaluate the social welfare impact of implementing a sustainable rural development program. Results show that a “naive” analytical approach that excludes protesters from the analysis would result in significantly higher willingness to pay estimates for those individuals who favor the implementation of the program and agree to reveal their true reservation prices.     

Declining inflows and more frequent droughts in the Murray–Darling Basin: climate change,impacts and adaptation*

It is likely that climate change will be associated with reductions in inflows of water to the Murray–Darling Basin. In this study, we analyse the effects of climate change in the Murray–Darling Basin using a simulation model that incorporates a state‐contingent representation of uncertainty. The severity of the impact depends, in large measure, on the extent to which climate change is manifested as an increase in the frequency of drought conditions. Adaptation will partially offset the adverse impact of climate change.     

Political Responses to Dam‐Induced Resettlement in Northern Uplands Vietnam

Dam‐induced resettlers in Vietnam manifest their responses and resistances in many different ways. This is a multiple response that expresses itself at many different levels and is spatio‐temporally contingent. These actors can be individuals, families, groups of people or communities. Drawing on fieldwork in resettlement sites of the S?n La hydropower dam in the north‐west of Vietnam, this paper explores how political responses and resistance among S?n La's resettlers were produced through resettlement conditions. It examines intensive and violent struggles over the land and resources surrounding dam sites, and aims to understand why rural disputes in resettlement sites were often between villagers rather than with the state institutions and local authorities.     

Collateral‐free lending with risk‐contingent credit for agricultural development: indemnifying loans against pulse crop price risk in India

This article addresses the problem of collateral‐free lending in the context of agricultural development. We investigate a viable alternative to traditional credit products through the development of risk‐contingent credit for operating loans and farm mortgages and apply the concept to agricultural loans for pulse crops in India. Risk‐contingent credit mitigates business and financial risk by reducing debt obligations depending on the embedded commodity options whose payoffs are linked with commodity price fluctuations. We analyze daily commodity spot prices for pulse crops in India and show how risk‐contingent structured financial instruments can be priced in practice.     

Willingness to Pay for Insured Loans in Northern Ghana

Index insurance has been heralded as a potential solution to risk management problems faced by smallholder farmers in developing countries. Despite its potential, demand for standalone index insurance contracts has remained low in early field trials. We investigate the willingness to pay for drought index insurance‐backed loans in northern Ghana using contingent valuation. We find that index insurance lowers overall demand for agricultural loans. We also compare micro‐level index insurance, provided directly to farmers, with meso‐level insurance, provided to the credit agency and find that farmers appear to prefer micro‐level insurance. Finally, farmers are willing to pay to avoid basis risk.     

The Contingent Tariff of the Special Safeguard Mechanism: What Happens When Markets are Imperfectly Competitive?

Contingent tariffs for agri‐food commodities have been proposed as a Special Safeguard Mechanism (SSM) in the Doha Round negotiations by the G33 group of countries as an instrument to control downward spikes in their border prices and/or surges of imports. The objective is to safeguard the livelihood security of farm households in poor countries. To date, most analysis of such tariffs uses stochastic partial equilibrium models with perfect competition. Yet in many markets for such commodities, imperfectly competitive market intermediaries play an important role in determining producers' prices, as do state trading enterprises (STEs). A stochastic partial equilibrium model of a typical importing country situation is specified in which there are either imperfectly competitive domestic intermediaries with a contingent tariff or an STE. The role of these intermediaries in influencing price behaviour and livelihood security in the presence of contingent tariffs alters the conclusion based on models of perfect competition. Using Monte‐Carlo simulation, it is shown that the efficacy of a contingent tariff is substantially reduced as the number of firms declines because increasingly they absorb the tariff, and the procurement price and producer surplus do not increase to the extent that they do under perfect competition.     

Estimating the Potential Benefits of New Health Claims in Canada: The Case of Soluble Fiber and Soy Protein

Growing awareness of the link between diet and health has spurred growth in the functional food sector. Health Canada regulates allowable health claims on food products, and in recent years has approved health claims linking the consumption of soluble fiber from barley (2012) and psyllium (2011) to reduced/lower low‐density lipoprotein (LDL)‐cholesterol levels, a major risk factor for heart disease. A health claim linking consumption of soy protein to reduced risk of coronary heart disease (CHD) is still under consideration. Using a cost‐of‐illness approach, this paper estimates the potential economic benefits of allowing health claims for soluble fiber and soy protein in terms of reductions in the direct and indirect costs of CHD. Parameters for the economic analysis are drawn from a meta‐analysis of scientific studies examining the effect of soluble fiber and soy protein on LDL‐cholesterol levels, as well as other scientific literature. While a barley soluble fiber health claim yields nontrivial benefits in a base case scenario equal to CAD$105 million annually and ranging from $42 million to $238 million in low and high scenarios, the potential benefits of a soy protein health claim appear to be several magnitudes larger at $549 million annually in the base case and ranging from $220 million to $1.25 billion in low/high scenarios. Given the relatively slow regulatory approval process for new health claims, there may be value in using economic estimates of potential gains to help prioritize health claims approval processes.     

Estimating the environmental effects and recreational benefits of cultivated flower land for environmental quality improvement in Taiwan

The main purpose of this study is to measure environmental effects and recreational benefits under different hypothetical scenarios program, involving quality improvement in Tien‐Wei Highway Garden, which is the biggest cultivated flower land in Taiwan. The contingent behavior model was adopted. The data combined actual number of trips under current quality of environment combined and the intended number of trips for expected scenarios of environmental quality improvement and congestion mitigation. For the empirical model, on‐site Poisson model was performed to correct truncated and endogenous stratification issues from on‐site surveys. The results show that the estimated average consumer surplus is greater in contingent behavior method than the one in the traditional travel cost model. Also, the estimated recreational benefits in contingent behavior method are more precise than those in the traditional travel cost method. The environment benefits to consumers are communicated with the programs that changes in environment quality. Meanwhile, the incremental economic benefits comprise the gain associated with the improvement of environmental quality.