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

on the benefits of currency reform abstract money allows agents to achieve allocations that are not possible without it however currency in most economies is a uniform object and there may be incentive compatible allocations that cannot be implemented with a uniform currency we show that currency reform i e changing the monetary base by replacing one currency with another is a powerful tool that can enable a monetary authority to achieve a desired allocation our monetary mechanism with currency reform is anonymous and features a nonlinear exchange rate between currencies and a monotone value of money these results help interpret the characteristics of currency reforms observed in practice

currency and credit in a private information economy in an environment with private information spatial separation and limited communication a currency like object and more standard named credits can be distinguished the credit objects can be used among agents in an enduring relationship that is among agents with known trading histories whereas the currency like object must be used among relative strangers in this environment collectively determined pareto optimal rules make the level of the currency like object and the mix of currency to named credits responsive to individual needs and to economywide states total indebtedness is determined by the number of lenders that is by preference or demand shocks and the mix of currency to credits is determined by transaction patterns among the agents

hot stuff index insurance for indian pepper growers summary we simulate the impact of a joint price and yield index insurance on the basis of a small representative panel data set of indian smallholder pepper growers affordable and feasible index insurance reduces crop revenue risk to around 68 of its original level while a reduction to 50 of this level can be achieved with ideal insurance basis risk is large for only a small fraction of farm households depending on risk aversion 5 30 of farm households is willing to pay for index insurance increasing to 12 50 with a 50 premium reduction opportunity costs of consumption smoothing in the form of lower productivity levels suggest potential welfare gains of specialization with insurance

designing and rating an area yield crop insurance contract this article documents the design and rate making procedures used in the development of the group risk plan grp the new federal crop insurance product that insures based on area yield the authors of this article worked closely with personnel in the federal crop insurance corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract grp indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield historical county yield data are used to develop forecasted yields and premium rates

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

welfare impacts of index insurance in the presence of a poverty trap this paper evaluates the welfare impacts of an index based livestock insurance designed to compensate for satellite based predicted livestock mortality in northern kenya where previous work has established the presence of poverty traps we simulate household wealth dynamics based on rich panel and experimental data the bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in herd size estimated willingness to pay among vulnerable groups who most need insurance is on average lower than commercially viable rates targeted premium subsidization nonetheless appears to offer more cost effective poverty reduction than need based direct transfers

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 hyp

coalition proof trade and the friedman rule in the lagos wright model the lagos wright model a monetary model in which pairwise meetings alternate in time with a centralized meeting has been extensively analyzed but always using particular trading protocols here trading protocols are replaced by two alternative notions of implementability one that allows only individual defections and one that also allows cooperative defections in meetings it is shown that the first best allocation is implementable under the stricter notion without taxation if people are sufficiently patient and if people are free to skip the centralized meeting then lump sum taxation used to pay interest on money does not enlarge the set of implementable allocations

optimum area yield crop insurance cet article determine le contrat optimal d assurance dont l indemnite depend du rendement agrege sur recoltes d un bassin de production le schema optimal d assurance est base sur le coefficient individuel de regression qui mesure la sensibilite du rendement agrege a des variations du rendement agrege une indemnite est versee lorsque le rendement agrege est inferieur superieur a un rendement critique si le coefficient de regression est positif negatif le contrat optimal contient une franchise evanescente si le coefficient de regression est superieur a l unite

liquidity monetary policy and unemployment a new monetarist approach we discover a consumption channel of monetary policy in a model with money and government bonds when the central bank withdraws government bonds short term or long term through open market operations it lowers returns on bonds the lower return has a direct negative impact on consumption by households that hold bonds and an indirect negative impact on consumption by households that hold money as a result firms earn less profits from production which leads to higher unemployment the existence of such a consumption channel can help us understand the effects of unconventional monetary policy

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

incentive feasible deflation abstract for competitive economies in which the real rate of return on money is too low the standard prescription is to engineer a deflation that is to operate monetary policy according to the friedman rule implicit in this recommendation is the availability of a lump sum tax instrument in this paper i view lump sum tax obligations as a form of debt subject to default while individuals may want to honor such obligations ex ante a lack of commitment the sine qua non of modern monetary theory may prevent them from the following through on their promises ex post when this is the case there may exist an incentive induced limit to deflationary policy

insuring against losses from transgenic contamination the case of pharmaceutical maize concerns about the risk of food supply contamination have limited the development and commercialization of certain pharmaceutical plants this article develops an insurance pricing model that helps translate these concerns into a cost benefit analysis the model first estimates the physical dispersal of maize pollen subject to a number of weather parameters this distribution is then validated with the limited amount of currently available field trial data the physical distribution is then used to calculate the premium for a fair valued insurance policy that would fund the destruction of possibly contaminated fields the flexible framework can be readily adapted to other crops management practices and regions

aggregation in area yield crop insurance the linear additive model previous analyses of area yield crop insurance have used a linear additive model lam to express the relationship between individual and area yield however the theoretical foundations of the lam are unknown this shortcoming is addressed by establishing two conditions linking microvariables and lam parameters the conditions relate to the interaction of risks in individual technologies and the extent of aggregation if systemic and individual risks are additive in individual yields and if the law of large numbers hold then the lam obtains this article also shows how departures from these conditions affect the results derived from a lam analysis a classic issue in agricultural economics is the design of schemes that would offer insurance against risks in agriculture the experience with conventional crop insurance has been disappointing as insurers have struggled to obtain reliable actuarial data on individual yields skees black and barnett the primary attraction of area yield insurance schemes is that insurers do not have to contend with the informational problems of moral hazard and adverse selection halcrow these problems can be dismissed because indemnities and premiums are based not on a producer s individual yield but rather on the aggregate yield of a surrounding geographical area however the key question is how adequate are aggregate yield instruments for reducing the risks faced by producers to address this question previous studies have expressed individual yields as a linear stochastic function of area yield mahul miranda vercammen the approach has been to use the form of a linear regression model where the dependent variable is the yield of an individual producer the only independent variable is area yield and the additive random error term measures omitted individual specific factors uncorrelated with area yield thus the model decomposes variations in individual yield in to variations in area yield that represent systemic risk and bharat ramaswami is senior economist in the indian statistical

existence of a monetary steady state in a matching model indivisible money abstract existence of a monetary steady state is established for a random matching model with divisible goods indivisible money an arbitrary bound on individual money holdings and take it or leave it offers by consumers the background environment is that in papers by shi and by trejos and wright the monetary steady state shown to exist has nice properties the value function defined on money holdings is strictly increasing and strictly concave and the measure over money holdings has full support

optimal money creation in pure currency economies a conjecture in a pure currency economy money is the only durable object and people have private histories in such economies taxation is not feasible and in some of them trade is enhanced through the use of money for economies of that kind in which a nondegenerate distribution of money part of the state of the economy affects trades and real outcomes and in which trades affect the state at the next date the conjecture is that there are transfer schemes financed by money creation that improve ex ante representative agent welfare relative to what can be achieved holding the stock of money fixed jel codes e52 e58 copyright 2014 oxford university press

parametric and nonparametric statistical modelling of crop yield implications for pricing crop insurance contracts this article considers alternative methods to calculate the fair premium rate of crop insurance contracts based on county yields the premium rate was calculated using parametric and nonparametric approaches to estimate the conditional agricultural yield density these methods were applied to a data set of county yield provided by the statistical and geography brazilian institute ibge for the period of 1990 through 2002 for soybean corn and wheat in the state of parana in this article we propose methodological alternatives to pricing crop insurance contracts resulting in more accurate premium rates in a situation of limited data

optimal coverage level choice with individual and area insurance plans we theoretically a farmer s optimal use of area and individual crop insurance when area and individual losses are positively but imperfectly correlated if premium rates for both plans are actuarially fair the farmer will demand full individual insurance and no area insurance if area insurance is free and individual insurance is offered at an actuarially fair rate area insurance replaces a portion of individual insurance demand if individual insurance is offered as a wrap around the area plan at an actuarially fair rate and area insurance is free the farmer will demand excess individual insurance and some area insurance copyright 2012 oxford university press

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

inside and outside money as alternative media of exchange we study a random matching model of money in which a subset of people called bankers have known histories and the rest called nonbankers have unknown histories earlier we showed that if there are no outside assets then an optimal arrangement has bankers issuing objects banknotes that are used in trades involving nonbankers here the same model is used to compare such exclusive use of inside money to the exclusive use of outside money we show that the set of implementable outcomes using outside money is a strict subset of the set using inside money

social norms and money abstract in an economy where there is no double coincidence of wants and without public record keeping of past transactions money is usually seen as the only mechanism that can support exchange in this paper we show that as long as the population is finite and agents are sufficiently patient a social norm establishing gift exchange can substitute for money however for a given discount factor population growth eventually leads to the breakdown of the social norm additionally increases in the degree of specialization in the economy can also undermine the social norm by contrast monetary equilibrium exists independent of the population size we conclude that money is essential as a medium of exchange when the population is large

unique monetary equilibrium with inflation in a stationary bewley aiyagari model abstract we prove the existence and uniqueness of a stationary monetary equilibrium in a bewley aiyagari model with idiosyncratic shocks this is an exchange economy with an infinite horizon and one consumption good and with each agent facing idiosyncratic endowment shocks at each period the agents may trade their endowments for the only asset fiat money the government increases the money supply at a constant growth rate that induces inflation in a stationary monetary equilibrium we identify the necessary and sufficient condition for a stationary monetary equilibrium where money has a positive value and the aggregate real balance is constant over time to exist and when it exists we show that it is unique the argument for uniqueness is based on a new monotonicity result for the average optimal consumption

money and credit redux do we need both money and credit in models with explicit roles for payment instruments we show the answer is no if credit is easy money is useless if credit is tight money can be essential but then credit is irrelevant and changes in debt limits are neutral real balances respond endogenously to leave total liquidity constant this is true for exogenous or endogenous policy and debt limits secured or unsecured credit and fairly general preferences and pricing mechanisms while we also show how to overturn some results the benchmark model suggests credit conditions matter less than some people think

introduction to the symposium issue on money and liquidity abstract this symposium on money and liquidity follows a conference held in santa barbara in august 2014 under the sponsorship of the laboratory for aggregate economics and finance at ucsb the conference was a celebration of the twenty fifth anniversary of the publication of kiyotaki and wright s on money as a medium of exchange this symposium contains a selection of the papers presented at the conference and a selection of regular submissions that fit the theme all papers were peer reviewed according to the usual jet procedures

decentralizing constrained efficient allocations in the lagos wright pure currency economy abstract this paper offers two ways to decentralize the constrained efficient allocation of the lagos wright 2005 pure currency economy the first way has divisible money take it or leave it offers by buyers and a transfer scheme financed by money creation if agents are sufficiently patient the first best is achieved for finite money growth rates if agents are impatient the equilibrium allocation approaches the constrained efficient allocation asymptotically as the money growth rate tends to infinity the second way has indivisible money take it or leave it offers by buyers and no government intervention we discuss the strict implementation of constrained efficient allocations and the applicability of our scheme to economies with lucas trees endogenous participation match specific heterogeneity and sequential competitive markets

coping with systemic risk in index based crop insurance the implementation of index based crop insurance is often impeded by the existence of systemic risk of insured losses we assess the effectiveness of two strategies for coping with systemic risk regional diversification and securitization with catastrophe cat bonds the analysis is conducted in an equilibrium pricing framework which allows the optimal price of the insurance and the number of traded contracts to be determined we also explore the role of basis risk and risk aversion of market agents the model is applied to a hypothetical area yield insurance for rice producers in northeast china if yields in two regions are positively correlated we find that enlarging the insured area leads to higher insurance premiums unless capital market investors are very risk averse a cat bond written on an area yield index outperforms regional diversification in terms of certainty equivalents of both farmers and insurers

a model in which monetary policy is about money abstract optimal monetary policy is studied in a model with i heterogeneity in the degree to which different people are monitored have publicly known histories ii idiosyncratic shocks that give rise to heterogeneity in earning and spending realizations and iii central bank intervention in a market in claims or credit in which the participants are those who are heavily monitored a special case of the model has everyone perfectly monitored in that case there is no role for money and no role for central bank intervention in the example displayed with imperfect monitoring optimal intervention is not simple

money as a mechanism in a bewley economy we study what features an economic environment might possess such that it would be pareto ecient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money we prove a conjecture that is essentially due to bewley 1980 1983 the gist is that monetary spot trading is nearly ecient ex ante in an environment where very patient agents can accumulate large enough money stocks to be completely self insured we also study examples where a nonmonetary mechanism is preferred ex ante to any monetary mechanism at least when the comparison is restricted to stationary equilibria and where an inflationary monetary mechanism is preferred ex ante to a laissez faire or deflationary monetary mechanism in an environment with impatient agents j e l classification e31 e42

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

nonneutrality of money in dispersion hume revisited for a class of standard and widely used preferences a one shot money injection in a standard matching model can induce a significant and persistent output response by dispersing the distribution of wealth decentralized trade matters for both persistence and significance in the presence of government bonds the injection has a liquidity effect and the inflation rate right following the injection may be below the steady state rate level

optimal fiscal and monetary policy equivalence results in this article we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy we consider standard monetary economies that differ in the price setting restrictions imposed on the firms we show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness in this sense environments with different price setting restrictions are equivalent

optimal area yield crop insurance reconsidered the implementability of area yield insurance contracts in the presence of symmetric and asymmetric information about the farmer s beta linking his yield to the risk pool s yield is examined in the presence of fixed costs and symmetric information mahul s result that optimality requires setting the slope of the indemnity schedule equal to each farmer s beta is confirmed when there is asymmetric information between the insurer and the farmer however this full insurance contract is vulnerable to adverse selection and therefore may not be implementable for general cost structures the optimal area yield insurance contract under asymmetric information is characterized

optimal monetary interventions in credit markets in an environment based on lagos and wright 2005 but with two rounds of pairwise meetings we introduce imperfect monitoring that resembles operations of unsecured loans we characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings we introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts we show that under the optimal trading mechanism both money and debt circulate in the economy and the optimal in ation rate is positive except for very high discount factors under which money alone achieves the rstbest our model captures the view that unconventional monetary policy encourages lending while it may create in ation

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

optimal insurance against climatic experience an optimal insurance contract against a climatic risk is derived in the presence of an uninsurable and dependent aggregate production risk the optimaldesign depends on the stochastic dependency between both sources of uncertainty and on the producer s attitude towards risk especially on his prudent behavior rationalweather insurance purchasing decisions are al so derived the prudent producer responds to actuarially fair weather insurance by increasing his exposure towards risk the u s multiple peril crop insurance program in which indemnity payments are based on the producer s individualyiel ds has been disappointing in that premiums have not been sufficient to cover indemnity payments and administrative costs this failure has induced the u s government to promote alternative insurance policies since 1993 the risk management agency has offered areayield contracts under its group risk plan in selected counties skees black and barnett another alternative is to base the indemnity on a weather index such as rainfall or temperature this policy was proposed in the past by sanderson but has failed to gain acceptance among policy makers the difficulties of rainfall insurance were a subject of debate in australia e g bardsley abey and davenport quiggin 1986 patrick the recent development of weather based instruments on financialmarkets known as weather derivatives for which the payoff depends on the cause of risk rather than on its effect on yield provide new opportunities for covering exposure to unfavorable weather events the objective of this article is threefold first a stochastic production function affected by a climatic risk and by an aggregate production risk where both sources of risk are stochastically dependent is de

finding optimal price risk management instruments the case of the spanish potato sector this article offers a comprehensive analysis of the problem of choosing between alternative market risk management instruments we model farmers behavior to optimize the certainty equivalent formulated by a mean variance model by combining instruments with and without basis risk results are expressed as the demands for hedging with futures forward contracts and insurance theoretical results are applied to a selection of spanish producers of fresh potatoes a sector that is exposed to significant market risks amsterdam s euronext provides potato futures prices and the recently launched revenue insurance in spain provides the example for price insurance three conclusions summarize the article s main findings first we show that spanish potato revenue insurance subsidies are a factor that determines the instrument rankings and choice second the efficiency of insurance subsidies is generally low finally the amsterdam potato futures market does not provide a cost effective means to manage price risks for spanish fresh potato growers

optimal monetary policy with heterogeneous money holdings abstract we study the optimal anticipated policy in a pure currency economy with flexible prices and a non degenerate distribution of money holdings the economy features a business cycle and lump sum monetary injections have distributional effects that depend on the state of the cycle we parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state under commitment the optimal policy prescribes monetary expansions in recessions when insurance is most needed by the cash poor unproductive agents conversely the optimal policy prescribes monetary contractions during booms so that the inflationary effect of the occasional expansions is undone

international risk sharing and economic growth international risk sharing which diversifies away income risk will reduce saving with constant relative risk aversion if growth arises from the external effects of human capital accumulation then reducing saving will reduce growth welfare also may fall with risk sharing because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth rate we demonstrate these results in a standard representative agent economy diversifying away rate of return risk also will reduce saving and growth rates if relative risk aversion exceeds one but this diversification always increases welfare this paper studies the effects of international risk sharing portfolio diversification in a world economy in which growth rates of income are endogenous growth is based upon the spillover effects of human capital accumulation as in lucas 1988 and romer 1986 there are positive economy wide spillovers of human capital intensity on individual labour productivity in section 2 we construct a multi country growth model with an infinitely lived representative agent in each country each country faces income risk but there is no aggregate uncertainty at the world level we focus on two market structures in the first structure there are no markets which allow for international diversification of country specific income risk in the second structure there are complete international markets for risksharing with no aggregate world uncertainty this completeness allows full diversification of country specific risk the paper has two central results first growth rates in all countries are lower in the equilibrium with full diversification second in this same structure welfare of each country may be lower than in an equilibrium without risk sharing the reasoning is as follows with external effects of capital accumulation the compet

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

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

further toward a theory of agricultural insurance the economic theory of contracts is applied to agricultural insurance to show that given full information pareto optimal insurance contracts are actuarially fair provide full coverage and differ for each individual the information problems of moral hazard and adverse selection prevent pareto optimality from being attained several second best solutions to these problems are applied to agricultural insurance it is shown that information collection and the application of contract design principles are second best solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies in theory agricultural insurance is an efficient risk sharing mechanism in practice however agricultural insurance has been a costly means of transferring risk from farmers to governments and or other insurers to induce farmers to participate in agricultural insurance governments have borne significant subsidy costs hazell pomareda and valdes p 295 in a recent study ahsan ali and kurian aak concluded that public subsidies are necessary to make agricultural insurance viable they also showed that insurance will increase output relative to a case with no insurance thus insurance is beneficial particularly in less developed countries where increasing food supplies is a policy goal for this reason they concluded that public subsidization of insurance also is desirable their conclusions are derived from a simplified model of production with one output and one input in this article we consider a more general production model with multiple inputs and outputs we show that aak s conclusion about the benefits of insurance may not hold depending on the nature of the inputs and outputs as defined by the production function carl h nelson is an assistant professor of agricultural economics

designing optimal crop revenue insurance when the indemnity schedule is contingent on the farmer s price and individual yield an optimal crop revenue insurance contract depends only on the farmer s gross revenue however this design is not efficient if as is the case with available contracts the coverage function is based on imperfect estimators of individual yield and or price the producer s degree of prudence and the extent of basis risks have important influences on the optimal indemnity schedule in this broader context optimal protection is not provided by available u s crop insurance contracts and may include combinations of revenue insurance yield insurance futures and options contracts

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

the two money theorem in this article i consider environments in which all shocks have finite support and any transfer of resources is ex post voluntary consider an allocation that is achievable when potential trading partners know each others histories the one money theorem says that the allocation is achievable using only one money if that money is divisible and money holdings are observable the two money theorem says that the allocation is achievable using two divisible monies even if money holdings are concealable copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a new suggestion for simplifying the theory of money we propose a new search theoretic model of monetary exchange with indivisible assets based on price posting instead of bargaining and incorporating noisy search this yields some familiar results plus a lot more the model admits multiple steady states due to the self referential nature of liquidity it admits cyclic chaotic and stochastic equilibria and compared to bargaining versions the dynamics are more general and have better microfoundations it generates price dispersion with interesting efficiency implications plus sticky prices and rational inattention parametric examples yield closed form solutions based on these results we suggest this should become a benchmark model in monetary economics

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

insurability and moral hazard in agricultural insurance markets pareto optimal and constrained pareto optimal all risk insurance contracts are studied conditions required for emergence of competitive insurance markets are isolated and discussed full insurance contracts are shown to be dominated by contracts involving coinsurance and deductibles if insurers are pseudo risk averse the effect of moral hazard on all risk agricultural insurance indemnity schedules is examined results for indemnity schedules under moral hazard and constant absolute risk aversion show that providing farmers with the incentives to take appropriate actions may imply lower deductibles in the presence of moral hazard than in the absence of moral hazard

the welfare effect of international asset market integration under nominal rigidities abstract this paper assesses the impact of integrating international asset markets when segmented markets are not the only distortion using a two country general equilibrium model with nominal rigidities and monetary shocks we show that integration is not universally beneficial instead the welfare impact depends on the degree to which exchange rate fluctuations are passed through to consumer prices while the integration is welfare neutral in the polar cases of complete or zero pass through this is not the case when pass through is partial when shocks are equally volatile in both countries integration can be detrimental or beneficial depending on the degree of pass through when shocks are more volatile in one country it benefits from integration compared with the more stable country

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

monetary exchange and the irreducible cost of inflation abstract this paper applies a mechanism design approach to construct a lower bound to the welfare cost of inflation that does not depend on quasi linear preferences or details of how agents trade an incentive feasible trading protocol is derived to minimize the welfare loss subject to frictions rendering money essential the welfare cost of inflation under this optimal protocol is the lower bound over all pairwise trading protocols of monetary exchange in general the first best is not implementable even under the friedman s rule patient agents and the optimal mechanism thus the lower bound depends on fundamentals like preferences and technology finally i estimate the irreducible cost of 10 inflation with the u s data from 1900 to 2000

essential interest bearing money i examine optimal monetary policy in a lagos and wright a unified framework for monetary theory and policy analysis j polit econ 113 2005 463 484 model where trade is centralized and all exchange is voluntary i identify a class of incentivefeasible policies that improve welfare beyond what is achievable with zero intervention any policy in this class necessarily entails a non negative inflation rate and a strictly positive nominal interest rate despite the absence of a lump sum tax instrument there exists an incentive feasible policy that implements the first best allocation

systemic risk reinsurance and the failure of crop insurance markets without affordable reinsurance private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm level yields defeating insurer efforts to pool risks across farms using an empirical model of the u s crop insurance market we find that u s crop insurer portfolios are twenty to fifty times riskier than they would be otherwise if yields were stochastically independent across farms we also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk reducing their risk exposure to levels typically experienced by more conventional property liability insurers copyright 1997 oxford university press

asset trading mechanisms and expansionary policy abstract previous authors have argued that the otimal monetary policy is contractionary if buyers value consumption substantially more than sellers there is some randomness and informational constraints make asset trading useful we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies

open market operations abstract in an open market operation the central bank swaps currency for bonds we show how injecting money in this way is different from transfers the way policy is usually formulated the model captures liquidity explicitly by modeling the roles of assets in frictional exchange under various specifications for market structure and the acceptability or pledgeability of assets we discuss implications for the fisher and quantity equations the possibility of negative nominal yields liquidity traps and market segmentation when liquidity is endogenized using information theory multiple equilibria emerge with different policy predictions interest on reserves and quantitative easing are discussed