testing informational assumptions in common value bidding models this paper provides an example of a means of linking mathematical theory laboratory experiments and standard empirical work theory by necessity abstracts from the naturally occurring world and experiments designed to test theory must incorporate the same abstractions on the other hand empirical tests are generally performed on naturallyoccurring data which may not reflect those same abstractions given this possible divergence naturally occurring data should be tested for consistency with theoretical assumptions whenever possible on the basis of standard symmetric bidding theory this paper reports on a preliminary version of such a test for off shore oil bidding data

who gains from capital market integration tax competition between unionized and non unionized countries the welfare effects of capital market integration are examined under a model of tax competition with two asymmetric countries the asymmetry is expressed through the labour market one country has a perfect labour market whereas the other country s labour market is unionized our results indicate that the welfare effects of capital market integration differ depending on whether governments are active or passive in attracting capital in the absence of active governments capital market integration benefits the country with a competitive labour market whereas it harms the unionized country capital market integration benefits both countries if governments are active and compete for mobile capital using taxes subsidies

contestability in real time experimental flow markets this article reports the results from laboratory markets using a new trading institution in which sellers post offers to sell flows of output in real time we use the new institution to examine the outcomes in natural monopoly experimental markets no stable price outcomes were observed in markets contestable by two firms a finding that is consistent with the contestable markets hypothesis but in conflict with assertions commonly made by those advancing the theory s role in policy formation the average efficiency of markets contestable by two firms while greater than that of monopoly markets protected from entry was significantly less than that associated with the sustainable equilibrium

mechanisms for incentive regulation theory and experiment this article develops the theoretical properties of a new incentive mechanism for regulating a monopoly seller and reports the results of laboratory experimental tests of its behavioral properties the design of the new mechanism draws upon the results of our earlier experimental research on the behavioral properties of two other mechanisms one by loeb and magat 1979 and a second by finsinger and vogelsang 1981 as with finsinger and vogelsang the new mechanism weakens loeb and magat s requirement that regulators have complete knowledge of market demand the new mechanism however is not subject to the destabilizing profit destroying cycles of nonoptimal behavior observed with finsinger and vogelsang s

stochastic production and heterogeneous risk preferences commercial fishers gear choices we present a model of fishers gear choice which allows for heterogeneity both in production technology and risk preferences and apply it on a panel of swedish trawlers stochastic revenue functions are estimated and used to predict the mean and standard deviation of revenue for each trip in a random parameters logit model we test if these predicted values explain gear choice a majority of fishers respond positively to increased mean and negatively to increased variability of expected landing values indicating risk aversion but also show a strong tendency to choose the same gear used on the previous trip

spot and futures prices of nonstorable commodities under rational expectations the paper examines the effect of the presence of a commodity futures market upon the price formation process in a stochastic rational expectations framework an optimizing model with price uncertainty and risk aversion is used in order to solve equilibrium distributions of prices for nonstorable commodities the existence of futures trading does not affect the degree of short term spot price fluctuations however if the commodity market disturbance that originates from stochastic consumption demand is serially dependent then the long term price variation is smaller with a futures market than without it futures prices fluctuate less variably over time than spot and expected prices finally there exists a futures intervention rule whereby the authority can stabilize spot prices and raise the overall welfare of society

tests for the role of risk aversion on input use for risk averting agents risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality in this article conditions are identified on a stochastic technology to test h that risk averters choose smaller input levels than risk neutral agents and h that an increase in risk aversion reduces input use a robust statistical method to test for dominance is adapted to stochastic production relations it is found that h is likely true for nitrogen application on iowa corn weaker evidence is found in favor of h

enterprise diversification in us dairy impact of risk preferences on scale and scope economies enterprise diversification has recently become a prominent feature of us dairy farms scope economies and risk aversion are two forces that simultaneously determine diversification we jointly estimate scope economies and determine risk preferences under price uncertainty we reject risk neutrality in favour of increasing absolute risk aversion iara and increasing relative risk aversion irra scope economies are significant but diminish with farm size increasing returns to scale exist in the production of multiple enterprises and diminish with size large farms operate under decreasing returns to scale ignoring risk preferences a common practice in empirical work results in an underestimate of the effect of scope economies for large farms

acreage decisions under risk the case of corn and soybeans an acreage supply response model is developed under expected utility maximization the resulting framework is used to specify and estimate a system of risk responsive acreage equations for corn and soybeans in the united states particular attention is given to the truncation effects of government price supports on the distribution of corn and soybean prices also a wealth variable is included in the acreage equations the empirical results indicate that risk and wealth variables play an important role in cornsoybean acreage decisions the analysis also shows that cross commodity risk reduction is important in acreage allocation decisions

the roles of risk and ambiguity in technology adoption we study the impacts of risk and ambiguity aversion on the adoption of new technologies specifically genetically modified gm corn and soy seeds we conduct experiments measuring risk and ambiguity aversion with midwestern grain farmers risk aversion has only a small impact on the timing of adoption of gm soy while ambiguity aversion has a large impact speeding up farmer adoption of gm corn we hypothesize that this unusual finding is due to the fact that gm corn often contains an insect resistance trait which reduces the ambiguity of pest damages for adopters gm soy never contains this insect resistance trait this highlights the importance of distinguishing between risk and ambiguity when studying the effects of aversion to uncertainty on adoption of new technologies

efficient collective decision making marginal cost pricing and quadratic voting we discuss the mechanisms related to quadratic voting from vickrey s counter speculation mechanism and his second price auction through the family of groves mechanisms and its most notable member the clarke mechanism to the expected externality mechanism goeree and zhang s mechanism the groves ledyard mechanism and the hylland zeckhauser mechanism we show that each mechanism that involves collective decisions has a quadratic aspect and that all of the mechanisms that we discuss are applications of the fundamental insight that for a process to be efficient all parties involved must bear the marginal social costs of their actions

washington biofuel feedstock crop supply under output price and quantity uncertainty abstract subsidized development of an in state biofuels industry has received some political support in the state of washington usa utilizing in state feedstock supplies could be an efficient way to stimulate biofuel industries and the local economy in this paper we estimate supply under output price and quantity uncertainty for major biofuel feedstock crops in washington farmers are expected to be risk averse and maximize the utility of profit and uncertainty we estimate very large washington price elasticities for corn and sugar beets but a small price elasticity for a third potential feedstock canola even with the large price elasticities for two potential feedstocks their current and historical production levels in the state are so low that unrealistically large incentives would likely be needed to obtain sufficient feedstock supply for a washington biofuel industry based on our examination of state and regional data we find low likelihood that a washington biofuels industry will develop in the near future primarily using within state biofuel feedstock crops

cost functions and duality for stochastic technologies cost functions dual to stochastic production technologies are derived and their properties are discussed these cost functions are shown to be consistent with expected utility maximization without placing serious structural restrictions on the underlying technology

market contestability in the presence of sunk entry costs this article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a natural monopoly type cost structure where sunk costs are neither zero nor infinite several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design sunk costs are found to weaken the support for strong interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance yet the disciplining power of contestability remains impressive with no indications of sustained monopoly pricing

the degree of decoupling of area payments for arable crops in the european union in 1992 the common agricultural policy cap of the european union eu significantly changed direction in the arable crop sector with the so called macsharry reform this reform which reduced cereal intervention prices eliminated output payments for oilseeds and introduced per hectare compensatory payments and a compulsory set aside requirement attached to these payments implied a significant change in the policy incentives to produce in 1999 intervention prices were cut further bringing them closer to world market levels as well as aligning payments of cereals and oilseeds the most recent reform in

insurance moral hazard and chemical use in agriculture this paper examines how crop insurance affects corn farmers fertilizer and pesticide use in the u s midwest crop insurance might be expected to affect chemical use because of moral hazard insured farmers may undertake riskier production than do uninsured farmers results suggest that insurance exerts considerable influence on corn farmers chemical use decisions those purchasing insurance applied significantly more nitrogen per acre 19 spent more on pesticides 21 and treated more acreage with both herbicides and insecticides 7 and 63 than did those not purchasing insurance these results suggest that both fertilizer and pesticides may be risk increasing inputs

the effects of market organization on conspiracies in restraint of trade abstract mindful of the market structure conduct performance paradigm fundamental to industrial organization research this paper uses laboratory experimental techniques to study the impact of conspiratorial opportunities on market performance we compare posted offer markets where sellers but not buyers are all conspiratorial opportunities with observations from three control groups 1 posted offer markets without conspiratorial opportunities 2 double auction markets with conspiratorial opportunities and 3 posted offer markets with true single seller monopolists the basic conclusions generated by our experimental design are 1 seller conspiracies in posted offer markets tend to raise prices but not profits relative to similarly organized markets without conspiracies 2 posted offer conspiracies tend to generate higher prices but not profits than double auction conspiracies and 3 posted offer monopolies tend to generate higher profits but not prices then posted offer conspiracies

the effects of shifts in a return distribution on optimal portfolios when the distribution of the returns of a risky asset undergoes a stochastically dominating shift a risk averse investor may not necessarily increase the investment in that asset this paper provides restrictions on the investor s utility function that are necessary and sufficient for a dominating shift to bring about no decrease in the investment in the respective asset if there are two risky assets in the portfolio these conditions are also necessary if there are n 2 assets and are necessary and sufficient if the utility function exhibits constant absolute risk aversion copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

structural agricultural land use modeling for spatial agro environmental policy analysis this paper develops a spatially disaggregated structural econometric model of agricultural land use and production based on the joint multi output technology representation introduced by chambers and just 1989 starting from a flexible specification of the farm profit function we derive land use allocation input application crop yield and livestock intensity equations in a joint and theoretically consistent framework to account for the presence of censored observations in micro level data the model is estimated as a system of two limit tobit equations via quasi maximum likelihood we present an empirical application using fine scale spatial data covering the entirety of england and wales and including the main economic policy and environmental drivers of land use change in the past forty years a simulation of the effects of diffuse pollution reduction measures illustrates how our approach can be applied for agro environmental policy appraisal

a nonparametric approach to identifying latent relationships in hierarchical models this paper provides a method for nonparametrically modeling the relationship between consumer preference for product features such as reliability or durability and covariates that describe consumers and how they use the product this relationship is of interest to firms designing and delivering products to a market because the extent to which consumers are sensitive to particular features determines the potential profitability of product offerings and affects decisions relating to appropriate distribution outlets and advertising strategies the successful identification of these relationships also aids in efficiently targeting marketing activities to specific segments of the consumer population the relationship between consumer preference for product features and observable covariates is important but is typically unknown in addition these relationships are often deeply embedded in a model hierarchy and are not observed directly for example in models of household choice the observed outcomes are multinomial with probabilities driven by latent utilities or values that consumers place on the choice alternatives these utilities are in turn a function of characteristics such as price and product features which are differentially valued of primary interest is the relationship between consumer sensitivity to product characteristics and readily observed covariates such as household demographics or aspects of product usage because the relationships of interest are not directly observed it is difficult to draw inferences about them without formal statistical models this paper presents a three level hierarchical bayes model for modeling binary consumer preferences as a function of observable covariates the hierarchical model nonparametrically estimates the relationships between consumer preferences for product features and the covariates without assuming a specific functional form a nonparametric model is particularly useful in the exploratory analysis of consumer data in which the primary purpose of the analysis is to generate further questions rather than provide specific answers to well posed questions this type of analysis is frequently encountered in marketing where a series of studies are commissioned to better understand the nature of demand the first level of the hierarchy in the bayesian model relates the binary consumer choice to the sensitivities of the consumer to product attributes such as brand name price reliability and durability the second level of the hierarchy models the heterogeneity across consumers using functions that relate attribute sensitivities to observable covariates this level of the hierarchy also allows each respondent to have unique demand coefficients by introducing random effect components the third level of the hierarchy specifies a smoothness prior for each of the unknown functions used in the second level the approach is flexible and works well both when the unknown function can be closely approximated by a linear function and when it cannot be a bayesian model selection technique is used to determine which functions can be modeled using a linear function and which ones should be modeled nonparametrically to provide the necessary flexibility to estimate the function accurately the proposed methodology is illustrated using data from a survey of consumer preferences for features of marine outboard engines that was collected as part of a consulting project our analysis focuses on measuring consumer preferences for engine features and their relationships to two variables related to boat length and engine size consumer preferences for engine features were obtained through a national survey conducted over the telephone preferences were elicited by means of a pairwise evaluation in which respondents chose between two engines that were identical in every respect except for two engine features the methodology can be modified to allow for more complex comparisons such as conjoint data collected in full profiles the application of a bayesian model selection procedure indicates that 4 of the 28 covariate relationships in the model are nonlinear while the other 24 are linear the preferences associated with these four functions are involved in 56 of the pairwise comparisons in the study therefore in practice if the nonlinear functions are not properly estimated there is the potential to draw misleading inferences regarding 56 of the pairwise choices firms can use the estimates of the functions relating preferences to covariates in a number of ways first they can use the covariates to determine the total number of consumers who have high demand for a particular product feature and then they can target communication efforts to those individuals alternatively the empirical results can be used as a basis of subsequent analysis to obtain a more complete characterization of a market segment

regulation by price adjustment the regulatory price adjustment process originally proposed by vogelsang and finsinger has been shown to be vulnerable to strategic manipulation by the regulated firm this article proposes several modifications to that scheme which improve its performance and broaden its applicability inclusion of a monopoly franchise market and the firm s past prices and earnings in the price adjustment constraints are shown to ensure efficient production by the firm and convergence to ramsey prices regardless of the firm s cost structure

how reliable is duality theory in empirical work the neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology this relationship commonly referred to as duality theory has been widely used in empirical work to estimate production parameters such as elasticities and returns to scale we generate a pseudo dataset by monte carlo simulations which starting from known production parameters yield a dataset with the main characteristics of u s agriculture in terms of unobserved firm heterogeneity decisions under uncertainty unexpected production and price shocks endogenous prices output and input aggregation measurement error in variables and omitted variables production parameters are not precisely recovered when performing econometric estimation based on the duality approach and the elasticity estimates are inaccurate deviations of own and cross price elasticities from initial median values given our parameter calibration range between 6 and 690 with an average of 90 also own price elasticities are as imprecisely recovered as cross price elasticities sensitivity analysis shows that results still hold for different sources and levels of noise and sample size used in estimation

symmetry restrictions in the analysis of the competitive firm under price uncertainty this paper shows that if the production function is appropriately restricted some symmetry reciprocity results that hold for a competitive firm under certainty continue to hold under price uncertainty for any strictly concave utility function in contrast earlier analyses have established these symmetry relations by imposing restrictions on the utility function the present analysis uses the envelope theorem the indirect utility function and the duality between production and cost copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

risk and the value of bt corn a conceptual model is developed to evaluate the effect of bt corn on risk results highlight the importance of distinguishing between marginal and aggregate risk effects and demonstrate that the effect of bt corn on risk depends crucially on the price paid for the technology empirical results show that depending on the price bt corn can be marginally risk increasing or decreasing and can either increase or decrease corn acreage also depending on the price bt corn can provide a risk benefit to farmers even when bt corn is risk increasing bt corn is genetically engineered to produce a protein found in the soil bacterium bacillus thuringiensis bt the protein is toxic to lepidopterous insects such as the european

the costs and benefits of refuge requirements the case of bt cotton abstract refuge requirements have been the primary regulatory tool to delay pest resistance to bt crops this paper presents a simple method to estimate the annual cost of refuges to producers applying it to bt cotton it also examines broader welfare impacts estimating how bt cotton acreage restrictions affect producer surplus consumer surplus seed supplier profits and commodity program outlays the implications of grower adoption behavior partial adoption aggregate adoption and refuge choice for regulatory costs are examined empirical examples illustrate how providing multiple refuge options significantly reduces regulatory costs

worker substitutability and patterns of unionisation a strategic three party bargaining model is developed in which one distinguished party the firm has to reac h agreements with the other two each of which is a group of workers in the prebargaining stage the two worker groups decide whether to organize jointly or separately the main observation relates the equi librium pattern of unionization to the substitutability in production between the two groups the outcome is joint or separate unions acco rding to whether the two groups are substitute or complementary facto rs of production the analysis also considers possibilities for firm s strategic intervention in the unionization process copyright 1988 by royal economic society

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

modeling the reforms of the common agricultural policy for arable crops under uncertainty the size of the insurance and wealth effects of a change in the common agricultural policy cap for arable crops is estimated the impact of price uncertainty is accounted for in the specific decision making structure of the european union eu arable crop producers under nonlinear mean variance risk preferences a system of output supply input demand and land allocation equations is estimated on a sample of italian specialized arable crop farms the simulation of the impact of the recent reforms confirms that farmers output responses are consistently affected by the size of the insurance and wealth effects

laboratory subjects as multiproduct monopoly firms an experimental investigation abstract previous experimental research demonstrates that market responses of laboratory subjects as monopoly firms converge to theoretic predictions this research increases the complexity of market decisions facing such subjects each subject is established as a multiproduct monopoly firm capable of producing two distinct goods in this environment the seller must select a selling strategy from limited alternatives and offer prices results show that market responses of subjects are more likely to converge to multiproduct monopoly model predictions when strategy options are relatively simple or when greater rewards are present results are consistent with profit maximizing behavior

worldwide acreage and yield response to international price change and volatility a dynamic panel data analysis for wheat rice corn and soybeans this study estimates a worldwide aggregate supply response for key agricultural commodities namely wheat rice corn and soybeans by employing a newly developed multi country crop and calendar specific seasonally disaggregated model with price changes and price volatility applied accordingly the findings reveal that although higher output prices serve as incentives to improve global crop supply as expected output price volatility acts as a disincentive depending on the crop the results show that own price supply elasticities range from about 0 05 to 0 40 output price volatility however has negative correlations with crop supply implying that farmers shift land other inputs and yield improving investments to crops with less volatile prices simulating the impact of price dynamics since 2006 we find that price risk has reduced the production response of wheat in particular and to a lesser extent rice thus dampening price incentive effects the simulation analysis shows that the increase in own crop price volatility during the 2006 2010 period has dampened yield by about 1 2 for the crops considered

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

monopoly behaviour decentralized regulation and contestable markets an experimental evaluation this study provides a comparative experimental evaluation of several alternative approaches to the single product monopoly problem we contrast incentive compatible decentralized regulatory mechanisms with notions of market contestability in a decreasing cost environment the decentralized regulatory mechanisms are found to be significantly more effective at restraining monopoly power than is allowing direct contestability but the regulatory mechanisms examined require that the regulatory agency know the market demand curve though not the industry cost curve since this is significantly more information than is required to implement direct contestability an interesting tradeoff is suggested does the greater efficiency in monopoly restraint provided by the regulatory mechanism relative to direct contestability outweigh the former s greater informational requirements

adjustment to production uncertainty and the theory of the firm this paper considers the behavior of the firm which faces uncertainty in its production process but can adjust its output once the uncertainty is resolved ex post adjustment unlike previous treatments involves a marginal cost penalty if more output is required and a lowering of price if too much is produced with ex post adjustment allowed in this fashion it is found that nonlinear risk preferences do not affect the sign of the firm s marginal risk premium at optimum ex ante output the firm will produce less output than under certainty whether it is risk averse risk neutral or prefers risk

budgetary and producer welfare effects of revenue insurance legislation passed in 1996 changed the way the u s federal government acts to reduce risks faced by u s crop products the authors compare the new alternative forms of revenue insurance to the 1990 deficiency payment program and to a no program alternative they estimate the effects of the alternative polices on the acreage allocations of a representative farm on the expected government cost and on producer welfare simulation results indicate that a revenue insurance scheme that guarantees 75 percent of expected revenue to risk averse produced could provide approximately the same level of benefits as the 1990 program at as little as one fourth the cost

production risk and optimal input decisions the paper examines the impact of production risk on a producer s optimal input decisions whether producers use more or fewer inputs in a yield risky environment depends on the sign of the marginal risk premium which is determined by risk preferences and technology i present the weakest condition on technology that is sufficient to sign the marginal risk premium for all risk averse preferences if this condition fails to hold the marginal risk premium is not of the same sign for all risk averters results are used to explore the properties of an estimated technology

joint risk preference technology estimation with a primal system applied studies of the firm in a risky environment have concentrated either on the firm s technology or on its risk preferences these models result in generally inconsistent and inefficient parameter estimates a primal model is proposed which allows a firm s preferences and technology to be estimated jointly in the presence of risk the model is applied to iowa corn production and estimated technology parameters are compared with those from other approaches modest risk aversion leads to inelastic even backbending per acre supplies and input demands yield heteroskedasticity in inputs leads to supply heteroskedasticity in prices especially for risk neutral firms

nonparametric regression techniques in economics this introduction to nonparametric regression emphasizes techniques that might be most accessible and useful to the applied economist the paper begins with a brief overview of the class of models under study and central theoretical issues such as the curse of dimensionality the bias variance trade off and rates of convergence the paper then focuses on kernel and nonparametric least squares estimation of the nonparametric regression model and optimal differencing estimation of the partial linear model constrained estimation and hypothesis testing is also discussed empirical examples include returns to scale in electricity distribution and hedonic pricing of housing attributes

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

production uncertainty and the market equilibrium of the competitive firm abstract assumptions outputs are planned ex ante by risk neutral firms actual outputs are stochastic with variance function of planned output production costs are function of planned outputs while the market linear demand function is stable if individual outputs as positively correlated expected profit is decreased by the negative covariance between output and price the firms and market equilibria are analyzed in the short run and the long run with varying number of firms they are compared with oi s and tisdell s uncertain demand models

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

the competitive firm with uncertainty in the rate of labor turnover the adoption of more sophisticated production techniques usually requires firms to increase their expenditures on worker training and to pay greater attention to the costs of labor turnover economists are beginning to explicitly incorporate both training expenditures and the rate of labor turnover into the theory of the firm at the same time they are extending the theory of the firm to cases in which the firm faces uncertainty in its environment for example uncertainty in the price of output the prices of inputs or the quantity of output that a given input mix will yield this paper seeks to extend both of these areas of research by first introducing uncertainty in the rate of labor turnover and then examining the consequences of this new form of uncertainty for optimal training expenditures the optimal wage and the optimal level of output at the firm the paper assumes that the firm can increase output by providing workers with more training and can discourage turnover by paying workers a higher wage the quantities of labor and capital that the firm employs are held constant throughout the analysis it is found that the introduction of uncertainty in the rate of labor turnover results in lower optimal expenditures for both training and wages the reduction in training also reduces the level of output per worker at the firm comparative static analysis of ceteris paribus changes in the mean and variance of the labor turnover rate are also performed an increase in the mean of the turnover rate with the variance held constant reduces the wage and the amount of training provided also an increase in the variance of the turnover rate with the mean held constant reduces the wage and the amount of training provided a number of authors have considered models of the competitive firm in which the firm must determine its output level in the presence of uncertainty sandmo 13 batra and ullah 2 hartman 7 ishii 9 ingene and yu 8 flacco 5 and many others consider the behavior of the competitive firm facing uncertainty in its output price blair 3 ratti and ullah 12 stewart 15 perrakis 11 macminn and holtman 10 and many others consider cases in which the firm faces uncertainty in its technology or factor prices in all of these models it is assumed that the firm must make its input and output decisions before the uncertainty is resolved without ex

pests and pesticides risk and risk aversion abstract theoretical and applied literature on risk in decision making for agricultural pest control is reviewed risk can affect pesticide decision making either because of risk aversion or because of its influence on expected profit it is concluded that risk does not necessarily lead to increased pesticide use by individual farmers uncertainty about some variables such as pest density and pest mortality does lead to higher optimal pesticide use under risk aversion however uncertainty about other important variables such as output price and yield leads to lower optimal levels of pesticide use neglect of these variables in most studies has led to the false assumption that pesticides are always risk reducing inputs furthermore there is evidence that in general the pesticide dosage which maximises expected profit is lower under risk than under certainty depending on the balance of forces to increase and decrease pesticide use under risk in many circumstances the net effect of risk on optimal decision making for pest control may be minimal the effect on risk of information about pest density and other variables as in integrated pest management programmes is discussed evidence on this issue is mixed a range of analytical techniques for analysing risk in pest control is reviewed throughout the paper gaps in the existing literature are identified

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

an experimental test for risk aversion abstract this paper evaluates an experimental method to measure attitudes to risk in individual subjects the method is applied to study the degree of risk aversion of 46 subjects the results lead us to reject a working hypothesis of risk neutrality for such experimental subjects

risk aversion and yield uncertainty in duality models of production a mean variance approach a duality model of production is developed that endogenizes stochastic output decisions under risk aversion the model incorporates both yield and price uncertainty and nonlinear mean variance risk preferences this permits modeling of the firm s expected output supply and input demand decisions under risk and also in principle the firm s output variance decisions the duality model is tractable for empirical research

broken symmetry symmetry and price uncertainty or short and long run comparative statics of the competitive firm abstract the notion of broken or hidden symmetry is applied to a long run characterization of a competitive firm operating under price uncertainty the main result of the paper is the restoration of a slutsky type symmetry of the input demand functions within an expected utility framework which does not involve any assumption about risk aversion a second conclusion is that economic relations expressed in terms of relative quantities are essential in the long run comparative statics under price uncertainty

estimating economies of scope and scale under price risk and risk aversion this study uses duality to examine the effects of excluding output price risk and risk aversion on cost structures using data for kansas wheat and beef cow operations a dual risk model was used to determine multi product and product specific scale economies and economies of scope estimates for these measures were compared with those obtained from a deterministic model the results show that product specific scale economies are over estimated and economies of scope and multi product scale economies are under estimated for the deterministic model compared to the risk model

production decisions under joint price and production uncertainty abstract while production decisions in the presence of price uncertainty have been extensively studied this is not so for the case in which the level of production is itself uncertain in this paper we provide a decision analysis under multiplicative production uncertainty both with and without price uncertainty we depict equilibrium and obtain comparative statics results with the aid of a diagram based on the difference between expected price and marginal cost comparative statics results are obtained for the model with production uncertainty alone and also for simultaneous price and production uncertainty including two special cases we first derive results based on the arrow pratt coefficients of risk aversion and then supplement these with the ross measure of relative risk aversion since this proves useful in the presence of multiple sources of uncertainty we find that increases in risk both price and production or input prices reduce expected output however expected output supply is an increasing function of expected price only for low levels of risk aversion and in general the relationship is ambiguous

does the law of supply hold under uncertainty a widely held conjecture of economists is that the quantity supplied by pricetaking producers increases with an increase in output price law of supply this cornerstone of economics has been proven repeatedly with many techniques under many different sets of assumptions and is found in all textbooks on principles of economics most of these proofs assume full certainty of production relationships single product technology and or risk neutrality in a world of uncertainty one of the most crucial aspects of economic behaviour is risk aversion with risk aversion diversification is a basic response to economic uncertainty thus models of producer behaviour under uncertainty need to consider multioutput technology where diversification is a possibility this paper points out that the widely held law of supply may fail when these generalities risky multioutput production with risk aversion are introduced simultaneously where diversification is also affected by a capacity constraint in production conditions are developed under which the law fails holds the peculiar result occurs because increasing price can increase profit risk more than proportionally while expected profit increases proportionally this relative increase in risk causes a tendency to shift production capacity into an alternative activity the first section introduces a model of production under uncertainty the second section analyses the behaviour of supply in the special case of additive production risk without price risk the third section shows that similar problems can be encountered with other cases as well empirical examples which demonstrate relevance of the results are also given

risk aversion and price risk in duality models of production a linear mean variance approach a duality model of production is developed that permits risk aversion and price uncertainty the linear mean variance framework employed is tractable for empirical research in contrast to duality models of risk based on a generalized expected utility function the framework is more general than in standard price certainty models while retaining the simplicity needed for empirical research

forward market equilibrium economists have long been interested in the functioning of forward futures markets keynes and hicks were the first to write persuasively in support of the theory of normal backwardation this theory says the futures price is biased downward relative to the expected future spot price as a means of compensating speculators for taking long futures positions 12 8 in this theory speculators are viewed as providing insurance to hedgers who desire to take short futures positions to reduce the riskiness of their commodity holdings in addition to normal backwardation there are theories of unbiasedness and normal contango the unbiasedness theory says that the futures price equals the expected spot price while the normal contango theory says that the futures price exceeds the expected spot price 4 19 21 however the controversy over the three theories has not been entirely resolved it has been suggested 4 19 that each of the three theories could be applicable at various points during the planting harvesting processing cycle of a crop as the net hedging demand shifts from a large number of hedgers who desire to be short in the futures market to a large number of individuals who are long hedgers nonetheless the traditional theories of futures markets have been criticized because they are not grounded in a general equilibrium model where participants tastes endowments and beliefs interact so as to generate a market equilibrium incorporating both speculative and non speculative transactions 9 it is the purpose of this paper to provide a framework within which normal contango normal backwardation and unbiasedness can each occur for commodities which have certain well specified characteristics independent of the relative numbers of participants on each side of the futures market in the spirit of 9 we consider the major source of uncertainty to be technological in nature quantity risk and argue that the commonly used definitions of hedger one who sells forward some fraction of his crop yield and speculator are not very useful for economic analysis instead the more generally applicable concept of hedger as one who trades mean income for reductions in risk in the rothschild stiglitz sense 17 is supported because it

predatory pricing in a multiple market experiment a note abstract isaac and smith 1985a b present a strong behavioral case that predatory pricing is not an observable laboratory phenomenon we propose several modifications of their design resulting in a multiple market experiment in which predatory pricing is present the primary modification involves conducting several markets concurrently providing an active escape opportunity for any prey and a potential reward to a reputation for predation these results provide a behavioral existence proof for the predatory pricing phenomenon they do not address the issue of the phenomenon s behavioral robustness

should trade unions appreciate foreign direct investment abstract it is often argued that fdi hurts workers in the home country because jobs are moved abroad contrary to that view businessmen often argue that fdi benefits home workers because there will be an expansion in the firm we show that both views may be correct and whether home workers gain or lose on fdi depends on which kinds of activities the firm moves to the host country if there is a big degree of substitutability complementarity between activities in the home country and activities in the host country it is likely that the workers lose gain on fdi

interactions between agricultural and resource policy the importance of attitudes toward risk using a method proposed by meyer for deriving comparative statics results in the presence of risk this paper analyzes the effects of various agricultural and environmental policy alternatives on the choices of a risk averse producer with a just and pope production function many commonly held beliefs about policy effects are not supported unambiguously by economic theory for example a tax on pesticides will not necessarily reduce pesticide use or average output and a reduction in price of agricultural output will not necessarily lead to a reduction in use of water or agricultural chemicals

inter and intra seasonal crop acreage response to international food prices and implications of volatility understanding how producers make decisions to allot acreage among crops and how decisions about land use are affected by changes in prices and their volatility is fundamental for predicting the supply of staple crops and hence assessing the global food supply situation this study makes estimations of monthly i e seasonal versus annual global acreage response models for the world s principal staple food crops wheat corn soybeans and rice primary emphasis is given to the magnitude and speed of the allocation process estimation of intra annual acreage elasticity is crucial for expected food supply and for input demand especially in the light of the recent short term volatility in food prices the econometric results indicate that global crop acreage responds to crop prices and price risks input costs as well as a time trend depending on respective crop short run elasticities are about 0 05 to 0 40 price volatility tends to reduce acreage for some of the crops comparison of the annual and the monthly acreage response elasticities suggests that acreage adjusts seasonally around the globe to new information and expectations given the seasonality of agriculture time is of an essence for acreage response the analysis indicates that acreage allocation is more sensitive to prices in the northern hemisphere spring than in winter and the response varies across months

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

cost functions under production uncertainty we characterize the cost functions which would be consistent with expected utility maximization when production is uncertain it is not generally possible assuming risk aversion to use only expected output as the constraint in a cost minimization problem in some leading cases cost functions consistent with expected utility maximization are particularly useful because they are devoid of risk preferences

aggregation of price risk over commodities an economic index number approach this article extends the economic theory of index numbers to the aggregation of price risk over commodities in production superlative indexes of aggregate price risk are related to tornqvist and fisher type output quantity indexes an application to major crops in manitoba illustrates the empirical importance of the analysis

do counter cyclical payments in the 2002 us farm act create incentives to produce analytical results in the literature suggest that counter cyclical payments create risk related incentives to produce even if they are decoupled under certainty hennessy d a 1998 the production effects of agricultural income support polices under uncertainty am j agric econ 80 46 57 this paper develops a framework to assess the risk related incentives to produce created by commodity programmes like the loan deficiency payments ldps and the counter cyclical payments ccps in the 2002 us farm act because ccps are paid based on fixed production quantities they have a weaker risk reducing impact than ldps the latter have a direct impact through the variance of the producer price distributions while the impact of ccps is due only to the covariance between the ccp and the producer price distributions the methodology developed by chavas j p holt m t 1990 acreage decisions under risk the case of corn and soybeans am j agric econ 72 3 529 538 is applied to calculate the appropriate variance covariance matrix of the truncated producer price distributions under the 2002 farm act risk premia are computed showing that the risk related incentives created by ccps are significant and do not disappear for levels of production above the base production on which ccps are paid

joint estimation of risk preferences and technology flexible utility or futility a thought experiment is designed to investigate whether the structure of risk aversion i e the changes in absolute or relative risk aversion associated with changes in wealth can be estimated with reasonable precision from agricultural production data findings strongly suggest that typical production data are unlikely to allow identification of the structure of risk aversion a flexible utility parameterization is found to slightly worsen technology parameter estimates results also indicate that even under a restricted utility specification utility parameter estimates are biased further their quality is much worse when shocks are not large or samples are small

should governments subsidise inward foreign direct investment what happens when a government has incentives to subsidise inward fdi when labour markets are imperfectly competitive contrary to the traditional assumption in the literature we allow the production in the multinational firm to either complement or substitute for local production a new result is that the wage in the host country may decrease when production is moved to this country the reason is that the union in the host country internalises product market externalities between the firms furthermore it is shown that when a single country subsidises inward fdi total world welfare might increase

intra experimental income effects and risk aversion abstract harrison s 1986 modification of the bekker degroot and marshak 1964 mechanism for eliciting risk preferences is employed to test the hypotheses of expected utility theory with respect to changes in income increasing relative risk aversion and decreasing absolute risk aversion subjects in the laboratory are shown to exhibit such behavior

unionized labor markets and globalized capital markets abstract this paper studies the effects of international integration of capital markets in a world where countries differ in their labor market institutions one country has a perfectly competitive labor market while the other is unionized we show that workers should favor autarky in the unionized country but oppose it in the non unionized country and vice versa for owners of capital aggregate gains from integration however are negative we also show that under capital mobility an increase in relative bargaining power of unions does not always improve workers welfare

theory of the firm under the threat of input supply interruption economists have been intrigued by the behavior of firms under different types of risk and uncertainty relatively recently there has been a particular interest in the theory of production under input uncertainty perhaps as a reflection of the energy supply disruptions experienced in the 1970s nevertheless this literature concentrates on the firm s production decisions when the uncertainty stems from stochastic input deliveries or from the production process itself this paper extends the stochastic input analysis to the monopolistic firm operating under the threat of input supply interruption turnovsky 8 presents some results pertaining to production decisions under input supply uncertainty he examines the risk neutral competitive firm s response to a randomly delivered input allowing the firm to reject excess order deliveries martin 6 examines the competitive firm s optimal short run response to stochastic deliveries where the entire input deliveries cannot exceed orders in these frameworks random deliveries can stem from internal sources such as machine failures or external sources such as unanticipated input market shocks and transportation breakdowns both studies demonstrate that the uncertainty induces a stochastic input ordering bias by the firm while turnovsky 8 finds that the existence of uncertainty in one input supply will not alter the optimal order of the nonstochastic input this is the so called input independence result martin 6 finds that the effect of the uncertainty on the nonstochastic input orders will depend upon the inputs relationship in production in this paper as in turnovsky s and martin s papers the supply of one perishable input is stochastic unlike the existing models however the ex post input supply under the threat of interruption is dichotomous either interruption occurs in which case none of the input is delivered to the firm or interruption does not occur in which case the entire input order is delivered to the firm also the existing work by turnovsky 8 and martin 6 concentrates on the competitive firm whereas this paper focuses on the monopolistic firm s behavior under factor supply uncertainty 2

contestability in the presence of an alternate market an experimental examination most earlier experimental tests ofthe contestable market hypothesis assume a zero opportunity cost of entry this design feature makes interpretation of results in terms of entry behavior problematic the experimental study that i report tests contestability with the addition of an alternate market that yields a positive profit with certainty this safe haven operationalizes a positive opportunity cost of entry hit and run entry is observed in the experiments adjusted mean prices are not significantly different from the zero opportunity cost case two methodological questions are also examined in one treatment sellers price offers are allowed only in 0 25 increments the simplification of the sellers decision space makes collusive arrangements more probable secondly market outcomes using human subject buyers are compared with outcomes from experiments with computer simulated demand the disciplining effect of human subject buyers results in market prices that converge to competitive levels more quickly the theory of contestable markets as presented by william baumol in his 1981 address as outgoing president of the american economic association has received considerable attention since its introduction the thesis of contestability is that we can model a market that attains a competitive outcome without the large numbers price taking assumption in the perfectly contestable market envisioned by baumol and others we would observe the efficient competitive price in equilibrium even with few or only one active seller the threat of entry is the disciplining force that sustains the efficient price as an equilibrium previous experimental tests of the contestable market hypothesis for the natural monopoly case all include at least two active firms pricing in every period the laboratory outcomes of these markets are indistinguishable from the destructive competition that has historically concerned scholars sharkey 1982 one can assert that the competitive prices that result from these natural monopoly markets are due to cutthroat competition because that market is the only game in town the study of the contestable natural monopoly that i report allows subjects the option of earning a normal rate of return in an alternate market thus there is at least the possibility that we can observe a single active seller choosing the efficient price

technological uncertainty and the theory of the firm several recent articles 1 6 have generalized the theory of the firm to incorporate price uncertainty and risk aversion it is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium leland 5 provides a similar generalization given demand uncertainty however in each case the assumption of a well specified technology is maintained this paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm s optimal production decision like the earlier work on the theory of the firm we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium unlike the earlier work we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm s technology we show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior like its predecessors the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision we modify the baron and sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output as a result the entrepreneur s decision yields a random variable denoting output and a linear transformation of it denoting profit the entrepreneur chooses the random variable denoting profit to maximize his expected utility there are at least three distinct ways in which our notion of technological uncertainty may be interpreted first the entrepreneur may not know the location of the production surface in this case each production decision yields a random output an increase in the

a note on adjustment to production uncertainty and the theory of the firm this paper analyzes the impact of production uncertainty on the firm s optimal output decision if uncertainty is introduced by an additive risk variable then short run optimal output is unchanged but the owner manager s expected utility can change causing long run output effects if uncertainty is introduced by a multiplicative random variable then short run output can change as well

natural monopoly and contested markets some experimental results a firm may become a monopolist because the average cost of producing the product reaches a minimum at an output rate that is big enough to satisfy the entire market at a price that is profitable in a situation of this sort if there is more than one firm producing the product each must be producing at a higher thanminimum level of average cost each may be inclined to cut the price to increase its output rate and reduce its average costs the result is likely to be economic warfare and the survival of a single victor the monopolist

risk attitudes in first price auction experiments a bayesian analysis non cooperative bidding theory for sealed bid auctions generally implies testable predictions that are conditioned on the risk attitudes of agents received laboratory experiments that purport to test this theory do not generally control for the risk attitudes of subjects those experiments exhibit behavior inconsistent with popular bidding models that assume that agents have the same aversion to risk or are all risk neutral this paper constructs an explicit bayesian prior distribution for the risk attitudes of experimental subjects and reconsiders the experimental results it finds that observed bidding behavior is still inconsistent with the nash predictions when explicit prior weights are attached to alternative assumptions about subject risk attitudes thus one cannot account for observed bidding anomalies by appealing to uncontrolled nuisance variables such as risk attitudes non cooperative bidding theory for sealed bid auctions generally implies testable predictions that are conditioned on the risk attitudes of agents archetypical of this result is the nash equilibrium prediction for first price auctions for an object that is valued by agents in an independent and private manner received laboratory experiments that purport to test this theory do not generally control for the risk attitudes of subjects those experiments exhibit behavior inconsistent with popular bidding models that assume that agents have the same aversion to riskor are all risk neutral in this paper we construct an explicit prior distrlbution for the risk attitudes of experimental subjects and reconsider the experimental results we find that observed bidding behavior is indeed consistent with the nash predictions when explicit prior weights are attached to alternative assumptions about subject risk aversion however when one allows for risk loving subjects as well observed behavior is inconsistent with nash predictions thus one cannot account for observed bidding anomalies by appealing to uncontrolled nuisance variables such as risk attitudes in section i we consider a specific nash equilibrium ne bidding model due to cox roberson and smith 1982 and cox smith and walker 1988 that clearly illustrates the risk sensitivity of the theoretical predictions in section ii we provide independent evidence of the risk attitudes of experimental subjects in a test for risk attitudes developed by harrison 1986a this evidence allows us to construct an explicit prior probability density function over the coefficient of constant relative risk attitudes employed in the specific bidding model of section i in section iii we reconsider the evidence from the first price fp experiments reported in cox roberson and smith 1982 and cox smith and walker 1983a 1983b i a specific bidding model cox roberson and smith 1982 hereafter crs present a model based on a power function utility specification for agent i ui y y 1 received for publication august 31 1987 revision accepted for publication december 18 1989 university of south carolina i am grateful to two anonymous referees for helpful comments although they are not responsible for my conclusions

pesticide use environmental spillovers and efficiency a dea risk adjusted efficiency approach applied to dutch arable farming pesticides are widely used by crop producers in developed countries to combat risk associated with pests and diseases however their indiscriminate use can lead to various environmental spillovers that may alter the agricultural production environment thus contributing to production risk this study utilises a data envelopment analysis dea approach to measure performance of arable farms incorporating pesticides environmental spillovers and output variance as undesirable outputs in the efficiency analysis and taking explicitly into account the effect of pesticides and other inputs on production risk the application focuses on panel data from dutch arable farms over the period 2003 2007 a moment approach is used to compute output variance providing empirical representations of the risk increasing or decreasing nature of the used inputs finally shadow values of risk adjusted inputs are computed we find that pesticides are overused in dutch arable farming and there is a considerable evidence of the need for decreasing pesticides environmental spillovers

the impact of decoupled payments on farm choices conceptual and methodological challenges abstract in this paper we review the methodological framework for analysing decoupled payments in models of agricultural production market and technological uncertainty farm efficiency credit constraints farm household choices involving extra agricultural decisions policy uncertainty and long run impact of decoupling on investment and land values are the relevant issues that should be pursued by methodological and empirical analysis future research should refine the analysis of decoupled payments mainly trying to provide results that can be useful for policy simulation to bridge the gap between analysis at the individual level and sector policy models

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

constrained choices under risk there has recently been a revival of interest in the implications of rationing for economic theory extending the work of samuelson 21 tobin and houthakker 24 and pollak 16 recent papers by bruno 3 howard 8 latham 13 and neary and roberts 15 have explored the theory of producer and consumer behavior under quantity rationing these developments have provided useful hypotheses in the investigation of economic behavior for example they have stimulated a reexamination of macroeconomic disequilibrium however previous work seems to have focused on economic models in the absence of uncertainty yet given that production decisions are often made before output prices are known and in the absence of complete contingent markets sandmo 22 batra and ullah 2 and others have developed the theory of the competitive firm under price uncertainty under the expected utility maximization hypothesis such a theory provides useful information about the influence of changing economic conditions or of risk behavior on production decisions but because of the presence of short run adjustment costs leading to short run input fixity or because of regulatory or institutional constraints quantity rationing often influences production decisions in order to evaluate how rationing influences such decisions there is a need to develop a conceptual model of constrained choices of the firm under risk the objective of this paper is to explore the implications of quantity rationing in the context of production theory under price uncertainty by introducing risk and risk behavior it extends the classical analysis of quantity constrained production decisions 3 21 the implications of quantity constraints for risk responsive choice functions are derived using the concepts of compensated choice functions and virtual prices it is shown that expected price effects can be decomposed into substitution effects and wealth effects the substitution effects measure the effects of a change in expected price on the compensated choice functions the compensation being made through a change in initial wealth holding expected utility constant the wealth effects characterize risk preferences since a non zero wealth effect reflects a departure from an arrow pratt constant absolute risk aversion utility function the influence of rationing on the properties of ordinary as well as compensated choice functions is analyzed in details by deriving the implications of quantity constraints for firm behavior under uncertainty the paper presents a number of useful results concerning the influence of risk or technology on economic behavior under rationing for example a