WOOL PRICE STABILISATION AND PROFIT RISK FOR WOOL USERS

It has often been suggested that more stable wool prices would lead to an outward shift in the long-run demand for wool. To assess this claim it is necessary to examine different sources of risk and instability in wool prices and their impact on the risk borne by wool users. A model is presented in which the input and output decisions of a wool processor are related to interactions between the wool and yarn markets. It is concluded that, if fluctuations in final demand or exchange rates are the major sources of instability, the long-run effect of stabilising prices is to increase the risk faced by wool users and reduce that faced by wool growers.     

RESPONDENTS TO CONTINGENT VALUATION SURVEYS: CONSUMERS OR CITIZENS?

The fundamental assumption of the contingent valuation method (CYM) is that responses to CY questionnaires may be interpreted as expressions of consumer preferences. The consumer preference interpretation has been challenged in recent papers arguing that willingness to pay for wildlife preservation is generated, at least in part, by ethical concerns, rather than by a view that wildlife preservation will yield any benefit to individual respondents. Some further evidence bearing upon these questions is derived from a study of forest management in Australia undertaken by the Resource Assessment Commission (RAC). The evidence supports the interpretation that respondents are acting primarily as citizens.     

Is it too late to stabilise the global climate?

Assessment of the feasibility of stabilising the global climate requires consideration of trajectories for emissions of carbon dioxide and other greenhouse gases. This study presents a simple and robust analysis of feasible emissions trajectories. Consideration of feasible trajectories suggests that if the current pace of mitigation efforts is sustained, the likely outcome will be stabilisation at concentrations close to 500 parts per million. Such an outcome will imply a higher than 50 per cent probability of substantial damage from climate change and an enhanced risk of a catastrophic outcome.     

UNDERWRITING AGRICULTURAL COMMODITY PRICES

Underwriting schemes are increasingly being used as a basis for price policy in Australian agricultural industries. These policies simultaneously increase average returns and reduce the risk faced by producers. In this paper, conditions are discussed under which such a combination of policy targets may be desirable. The optimality properties of underwriting schemes in achieving these targets are examined and compared to those of alternative schemes. Aspects of underwriting scheme design are discussed.     

EXITS FROM THE AUSTRALIAN DAIRY INDUSTRY CAUSES AND PREDICTIONS

An analysis of data from Bureau of Agricultural Economics surveys established that farms that left the dairy industry in the 1970s were generally smaller than average, less profitable, and more likely to be those from which cream was still being delivered in cans. In addition, it was found that the probability of exit seemed to be little affected by movements in the relative prices of dairy products and beef. Predictive models which should prove useful in estimating future rates of exit from dairying were derived. Use of one of the models on 1979–80 data suggests the exit rate from the industry should be easing.     

Narrowing the no-arbitrage bounds

It is shown by example and by analytic argument that the no-arbitrage bounds can be narrowed by ruling out arbitrages between asset markets and stochastic production opportunities. The key analytic construct is the derivative-cost function. The narrowed no-arbitrage bounds can be calculated either as directional derivatives of the derivative-cost function or directly from the derivative-cost function itself. It is shown how some assets lying outside the subspace generated by the basis assets can be priced uniquely using the no-arbitrage prices associated with the derivative-cost function. An extension of the analysis to permit market frictions is briefly discussed.     

Invariant risk attitudes

Concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty, but are quite restrictive, particularly when they are imposed jointly. A generalization of constant risk aversion, referred to as invariant risk aversion is developed. Invariant risk aversion is closely related to the possibility of representing preferences over state-contingent income vectors in terms of two parameters, the mean and a linearly homogeneous, translation-invariant index of riskiness. The best-known index with such properties is the standard deviation. The properties of the capital asset pricing model, usually expressed in terms of the mean and standard deviation, may be extended to the case of general invariant preferences.     

Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

Separation results, as they are usually understood, refer to conditions under which a firm’s production decisions are independent of its risk attitudes. Well-understood situations where separation occurs typically include those where technically feasible production opportunities are replicable in financial markets. This paper gives necessary and sufficient conditions for separation that go beyond these well-understood spanning conditions. To do so, we present a unified treatment of the production and financial decisions available to a firm facing frictionless financial markets and a stochastic production technology under minimal assumptions about the firm’s technology and objective function.     

Dynamic pollution regulation

This paper examines pollution regulation in a dynamic setting with complete information. We show that tradeable pollution permits may not achieve the social optimum even when the permit market is perfectly competitive. The reason is that the optimal tradeable permits regulation will typically be time inconsistent. We then show that pollution taxes can achieve the first best and are time consistent.We thank Claudio Mezzetti, Wally Oates, and Paul Rhode for helpful comments. The last two authors thank the National Science Foundation for financial support.     

A state-contingent production approach to principal-agent problems with an application to point-source pollution control

Two basic representations of principal-agent relationships, the ‘state-space' and ‘parameterized distribution' formulations, have emerged. Although the state-space formulation appears more natural, analytical studies using this formulation have had limited success. This paper develops a state-space formulation of the moral-hazard problem using a general representation of production under uncertainty. A closed-form solution for the agency-cost problem is derived. Comparative-static results are deduced. Next we solve the principal's problem of selecting the optimal output given the agency-cost function. The analysis is applied to the problem of point-source pollution control.