index insurance quality and basis risk evidence from northern kenya the number of index insurance pilots in developing countries has grown tremendously in recent years but there has been little progress in our understanding of the quality of those products basis risk or remaining uninsured risk is a widely recognized but rarely measured feature of index insurance product quality this article uses eight semi annual seasons of longitudinal household data to examine the distribution of basis risk associated with an index based livestock insurance ibli product in northern kenya we find that ibli coverage reduces exposure to covariate risk due to large shocks and mitigates downside risk substantially for many households even at commercial premium rates but index insurance is no magic bullet insured households continue to face considerable basis risk examining the components of basis risk we find that ibli reduces exposure to covariate risk due to high loss events by an average of 63 the benefits of reduced covariate risk exposure are relatively small however due to high exposure to seemingly mostly random idiosyncratic risk even in this population often thought to suffer largely from covariate shocks the result is that ibli policyholders are left with an average of 69 of their original risk due to high loss events this research underscores the need for caution when promoting index insurance as a risk mitigation tool as well as the importance of product quality evaluation

allocation of fixed transmission cost to wheeling transactions by cooperative game theory this paper describes a methodology to allocate the cost of transmission network facilities to wheeling transactions in decentralized power systems the authors propose that the responsibility placed on transmission facilities involved in each transaction be according to the transmission usage pattern their proposal incorporates the mw mile method and considers economies of scale of transmission network facilities they also incorporate a nucleolus scheme in the cooperative game theory to deal with matters of conflict the applicability of their method is demonstrated in a numerical example

crop insurance and disaster assistance designs for wheat and grain sorghum this study compares the effectiveness of two crop insurance and two disaster assistance program designs used in conjunction with a government commodity program and a linked crop insurance government commodity program design stochastic dominance analysis of farm level net return distributions is used to select the preferred design s the results indicate that the disaster assistance programs are preferred over the alternatives the results also suggest that individual crop insurance is preferred to area crop insurance a subsidy is required for risk averse managers to prefer area crop insurance to individual crop insurance

min max fairness criteria for transmission fixed cost allocation conventionally transmission fixed cost allocation is carried out on postage stamp basis amongst various other ways of solving the problem the cost allocation under the usage based domain has also been suggested namely based on proportionate tracing and recently by optimization based real power tracing changing the cost allocation regime from postage stamp basis to usage based methods though technically sound can pose fairness issue the fairness criteria in its simplest form would allocate cost in equitable manner on per unit basis while meeting the constraints the optimization based tracing provides room for defining an objective leading to tracing compliant postage stamp method that strikes a balance in allocation between conventional postage stamp and proportionate tracing based methods in this paper we address this complex cost sharing problem by suggesting a min max fairness algorithm using optimization based real power tracing the min max algorithm achieves fairness by equalizing allocations within constrained space and reaching an equilibrium where further balancing cannot be achieved we show that computing min max fair solution simply corresponds to solving a sequence of sparse lp problems for real power tracing the algorithm satisfies the property of aggregate invariancy results on actual data of central transmission utility of western regional grid of india as well as ieee 30 bus system validate the claims the results are compared with the tracing compliant postage stamp method

financial bilateral contract negotiation in wholesale electricity markets using nash bargaining theory bilateral contracts are important risk hedging instruments constituting a major component in the portfolios held by many electric power market participants however bilateral contract negotiation is a complicated process as it involves risk management strategic bargaining and multi market participation this study analyzes a financial bilateral contract negotiation process between a generation company and a load serving entity in a wholesale electric power market with congestion managed by locational marginal pricing nash bargaining theory is used to model a pareto efficient settlement point the model predicts negotiation outcomes under various conditions and identifies circumstances in which the two parties might fail to reach an agreement both analysis and simulation are used to gain insight regarding how these negotiation outcomes systematically vary in response to changes in the participants risk preferences and price biases

an empirical analysis of the demand for multiple peril crop insurance knowledge of factors affecting farmer purchases of crop insurance is essential for evaluating the soundness and profitability of crop insurance programs despite this importance the demand for crop insurance has received limited empirical attention the present paper reports on an empirical assessment of the demand for crop insurance by iowa corn producers adverse selection in the insured pool suggests that producers with differing levels of loss risk have different demand elasticities loss risk is included in the empirical analysis and is found to influence the elasticity of demand results show average demand elasticities of about 0 32 for relative insured acres and 0 73 for liability per planted acre implications for the actuarial soundness of the industry are provided

debt neutrality theory and evidence from developing countries this paper reviews the ricardian barro hypothesis and tests the basic postulate of the model for a sample of developing countries including mexico and venezuela two specifications are utilized the first is based on the simple consumption model associated with the work of kormendi 1983 the alternative is based on a model developed by haque and montiel 1987 the outcome of the two stage least square estimation technique rejected the hypothesis in mexico trinidad and tobago and venezuela all countries which underwent adjustment programmes however these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the yaari blanchard effect the contradictory outcome alludes to the sensitivity of the results to the model specified

farmer response to modified crop insurance a case study of corn in indiana this study examines the potential effects on crop insurance of more detailed yield risk classifications combined with alternative premium setting techniques and higher yield guarantees combined with coinsurance corn producers in tippecanoe county indiana were surveyed for their responses to these changes response to area yield insurance is also evaluated the modified mpci program area yield insurance and two types of disaster payment programs are also compared in terms of their costs and coverage

market based coordination of transmission and generation capacity planning we propose an iso model for coordinating transmission expansion planning with competitive generation capacity planning in electricity markets the purpose of the model is a holistic simulation of generation and transmission capacity expansion in the market environment the solution represents an iterative process for simulating the interactions among gencos transcos and the iso which might be terminated by the iso based on a pre specified stopping criterion the proposed model adopts a joint energy and transmission auction market and a capacity mechanism the joint auction market enables competition to occur among generation and transmission resources the capacity mechanism offers incentives for market participant investments that reflect the locational values of additional capacity transmission capacity expansion decisions are made by merchant transmission lines that recover their capacity investments through transmission marginal pricing and capacity payments transmission network security is reflected in the proposed competitive resource planning model the examples illustrate a coordinated planning of generation and transmission in restructured power systems

social welfare maximization in transmission enhancement considering network congestion transmission enhancement in a competitive electricity market is analyzed in terms of its impact on the social welfare a formulation of social welfare and the utility functions are derived in this research variations of supply and demand during a year are considered in transmission enhancement decisions the proposed social welfare optimization problem is solved to determine the transmission congestion status under the optimal condition of the existing system transmission enhancement options are compared quantitatively to demonstrate their ability to increase social welfare which provides valuable information for long term transmission the proposed method provides a systematic and quantitative tool for social welfare evaluation that is not available in industry today

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

a nash approach to planning merchant transmission for renewable resource integration major transmission projects are needed to integrate and to deliver renewable energy re resources cost recovery is a serious impediment to transmission investment a negotiation methodology is developed in this study to guide transmission investment for re integration built on nash bargaining theory the methodology models a negotiation between an re generation company and a transmission company for the cost sharing and recovery of a new transmission line permitting delivery of re to the grid findings from a six bus test case demonstrate the pareto efficiency of the approach as well as its fairness in that it is consistent with one commonly used definition of fairness in cooperative games the nash cooperative solution hence the approach could potentially be used as a guideline for re investors the study also discusses the possibility of using re subsidies to steer the negotiated solution towards a system optimal transmission plan that maximizes total net benefits for all market participants the findings suggest that re subsidies can be effectively used to achieve system optimality when re prices are fixed through bilateral contracts but have limited ability to achieve system optimality when re prices are determined through locational marginal pricing this limitation needs to be recognized in the design of re subsidies

market based rate design for recovering merchant transmission investment merchant transmission projects mtps are primarily market solutions for importing inexpensive power when this energy is available as a market driven solution full recovery of the investment is not guaranteed in general the recovery is based on transmission service charges and the value of incremental financial transmission rights ftrs created by the project since ftrs are valuable only when the system is constrained the ftr s value diminishes as the constraint is eliminated by the mtp hence the mtp will be commercially viable only if its transmission capacity is fully subscribed otherwise the mtp will likely not be built

a bargaining model for a first time interaction under asymmetric beliefs of supply reliability we consider the case of a first time interaction between a buyer and a supplier who is unreliable in delivery the supplier declares her estimate of the ability to meet the order obligations but the buyer may have a different estimate which may be higher or lower than the suppliers estimate we derive the nash bargaining solution and discuss the role of using a down payment or nondelivery penalty in the contract for the case of buyer overtrust the down payment contract maximizes channel profits when the suppliers estimate is public information if the suppliers estimate is private information a nonsymmetric contract is shown to be efficient and incentive compatible for the case of buyer undertrust the contract structure is quite different as both players choose not to include down payments in the contract when delivery estimates are public information a nondelivery penalty contract is able to maximize channel profits if the buyer uses the suppliers estimate in making the ordering decision if estimates are private information channel profits are maximized only if the true estimates of both players are not far part we also discuss the effect of different risk profiles on the nature of the bargaining solution in three extensions of the model we consider the following variants of the basic problem first we analyze the effect of early versus late negotiation on the bargaining solution then we study the case of endogenous supply reliability and finally for the case of repeated interactions we discuss the impact of updating delivery estimates on the order quantity and negotiated prices of future orders

rate making for farm level crop insurance implications for adverse selection this research identifies two problems in the new federal crop insurance that may cause adverse selection a the relationship between rate making and expected yields for individual farmers and b the bias introduced in coverage protection when trends are not used to establish expected yields a theoretical investigation using the normality assumption demonstrates the potential severity of these problems and empirical results from farm level data lend further support as crop insurance changes to individualized methods of protection these issues will be particularly important for developing rates

marginal pricing of transmission services a comparative analysis of network cost allocation methods a strict marginal network pricing policy is not able to generate enough revenues to recover the cost of the primary transmission service other related network services are ignored here this cost recovery problem requires the stipulation of a complementary charge which completes the network marginal revenues this paper evaluates numerically and qualitatively three different allocation methods of the complementary charge marginal participation factors mean participation factors and benefit factors the evaluation has been applied to the spanish electrical system model

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

sensitivity of consumption to income and to government purchases some specification and estimation issues the paper derives a nonlinear error correction model ecm for consumption and shows that existing models that are based on quadratic utility combine permanent income and current income consumption and nest or could nest the hypothesis of substitutability between private consumption and government purchases are special cases of the ecm the importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using us aggregate quarterly data 1953 1 1992 4 the evidence suggests that the ecm produces more reliable estimates than do the existing restrictive models

an effective transmission network expansion cost allocation based on game theory the expansion of transmission systems impacts many entities in the market environment each entity may fare better or worse as a result of congestion relief in the presence of new investments negatively affected firms exert their influence to prevent the expansion from taking place the opposition of these firms and the lack of appropriate incentives results in insufficient investments in transmission assets the network is being frequently used at its maximum limits leading to economic inefficiencies and reduced reliability hence there is a need for effective incentive schemes for network expansion in this paper we propose a game theory based scheme for the allocation of transmission expansion costs among market entities the allocation takes into account both the physical and economic impacts of the new transmission assets and the influence of each firm on the expansion decision this is the first scheme designed to give all market participants explicit incentives to support the expansion the application of the allocation solution to the garver six bus system is presented to illustrate the capabilities of the proposed method

an empirical analysis on the substitutability between private consumption and government purchases abstract this paper estimates substitutability of government purchases for private consumption using an optimal consumption model the utility function features several types of nonseparabilities the paper finds that gmm estimates are affected by the specification of nonseparability between private consumption and government purchases by the restriction of time separability and by the measurement of real interest rates

fiscal policy and aggregate demand reply there appear to be two main conclusions of fred c graham s paper first he argues that the empirical evidence in aschauer 1985 supporting the permanent income hypothesis and a significant degree of substitutability between private consumption and government spending is specific to the sample period and to the limited nature of aschauer s unrestricted alternative model graham 1993 p 666 second after disaggregating government spending into various components he finds limited support for the hypothesis that federal nondefense spending as opposed to total federal state and local spending substitutes for private consumption the focus of my 1985 paper was on deriving a test of the ricardian equivalence theorem within an euler equation framework graham seems to have missed this point indeed there is no evidence in his paper to support the keynesian view that tax cuts stimulate private consumption and aggregate demand admittedly graham finds that changes in disposable income lead to changes in private consumption but this is not enough to support the standard keynesian analysis specifically it is necessary to determine whether tax changes per se induce changes in consumption spending consider a model similar to graham s equation 4 namely