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

reward structures in a planned economy some difficulties there is an extensive literature on the socially optimal pricing policy for public firms but much less attention has been paid to the vital question of how managers of public firms can be induced to follow such policies the politicians or planners who seek to control a public enterprise will be less well informed about cost and demand functions than the manager and there is no reason to suppose that managers are altruists thus with asymmetrical information and selfish managers there is a significant control problem recently tam 1981 has suggested an ingenious iterative incentive mechanism designed to surmount this problem this note a argues that her negative price incentive scheme npis will not achieve its objective of guiding managers to price at marginal cost2 and b compares npis with variants of the performance index pi proposed by scott 1952 1978 and finsinger and vogelsang 1980a 1981 tam s proposal is that the manager of a public firm be paid a bonus b each period

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

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

poverty traps and index based risk transfer products summary a growing literature suggests that in low income countries households with few assets can be trapped in chronic poverty this article reviews relevant threads of the poverty traps literature to motivate a description of the opportunities presented by innovative index based risk transfer products these products can be used to address some insurance and credit market failures that contribute to the persistence of poverty among households in low income countries applications are considered at the micro meso and macro levels 2008 elsevier ltd all rights reserved

socially optimal pricing with rivalry and economies of scale this article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint pricing principles are derived and related to the rules developed in the literature for the regulated monopolist for some firms excess profits may prevail at efficient prices and the form of the inverse elasticity rule is altered in markets with rivalry however the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump sum interfirm payments a numerical example is provided

the short run and long run effects of behavioral interventions experimental evidence from energy conservation we document three remarkable features of the opower program in which social comparison based home energy reports are repeatedly mailed to more than six million households nationwide first initial reports cause high frequency action and backsliding but these cycles attenuate over time second if reports are discontinued after two years effects are relatively persistent decaying at 10 20 percent per year third consumers are slow to habituate they continue to respond to repeated treatment even after two years we show that the previous conservative assumptions about post intervention persistence had dramatically understated cost effectiveness and illustrate how empirical estimates can optimize program design jel d12 d83 l94 q41

incentives for conservation and quality improvement by public utilities the author examines the design of incentive programs to motivate regulated utilities to supply both basic service e g electricity supply local telephone service and service enhancements e g energy conservation services improved clarity and speed of voice communication the optimal regulatory programs are shown to vary greatly depending upon the information available to the regulator the price of the basic service may optimally be distorted above or below marginal cost to better motivate the supply of the service enhancement policy prescriptions are compared with current programs and proposals to promote energy conservation 35 refs 2 figs

two part tariffs as regulatory constraints abstract this paper introduces a regulatory two part monopoly pricing mechanism with desirable properties assuming that firm managers are informed about cost and demand functions no detailed prior information of the regulator about the regulated firm and its environment is required also subsequent observations of the regulator are restricted to verifiable bookkeeping data nevertheless the pricing formula is simple and easily interpreted the firm may freely choose the variable price of the two part tariff as long as the fixed part obeys a constraint the firm will then in every period receive an approximation to the welfare change caused by its price changes over the last period contrary to most other suggestions for incentive pricing the current approach requires no government subsidies

incentive mechanisms for environmental protection under asymmetric information a case study the purpose of this paper is to compare the performance of some instruments of environmental policy using data for a coal fired power plant each decentralized scheme coverages towards the social optimum chosen by a regulator we look at the performance of a changing tax rate on emission of an announcement of the tax formula of an announcement of the tax formula with a tax refund possibility and of a tax cum subsidy scheme our emphasis is on full information concerning the tax and subsidy formulas and on the opportunity for the firm to optimize intertemporally we also test two performance schemes which combine social optimal pricing with optimal abatement decisions our interest is to compare the speed of convergence of the schemes the monetary side payments subsidy bonus required and to look for self financing schemes

intertemporal price cap regulation under uncertainty this paper examines the intertemporal price cap regulation of a firm that has market power under uncertainty the unconstrained firm waits longer before investing or adding to capacity and as a corollary enjoys higher prices over time than would be observed in an equivalent competitive industry in the certainty case the imposition of an inter temporal price cap can be used to realise the competitive market solution by contrast under uncertainty it cannot even if the price cap is optimally chosen under uncertainty the monopoly firm will generally a under invest and b impose quantity rationing on its customers

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

supply response to agricultural insurance risk reduction and moral hazard effects this paper examines the consequences of agricultural insurance for expected supply the effect of insurance is shown to decompose into a risk reduction effect as well as a moral hazard effect the direction and magnitude of these effects depend on the parameters of the insurance contract producer s risk preferences and the underlying technology two models are considered for this purpose in the first model widely employed in the literature a producer controls only one input the second model uses a dual approach to extend the results to the case where a producer controls multiple inputs

reward structures in a planned economy the problem of incentives and efficient allocation of resources this paper considers a reward mechanism for inducing the choice of a socially optimal level of output by a socialist price setting manager under this mechanism the planner is assumed to have no information other than the observed output and price level it thus has informational advantages over other schemes thus far discussed in the literature the other schemes require the additional knowledge of demand elasticities of all the products produced in the economy besides this informational advantage the reward structure suggested here also eliminates other basic weaknesses of those schemes suggested previously

regulation with non price discrimination abstract this paper considers the optimal regulation of access charges and the effect such regulation has on incentives for non price discrimination i show that when a vertically integrated firm is able to discriminate against rivals by means of non price measures optimal access charges must be set higher than in the case when no discrimination is possible since the level of the access charge affects incentives to practice foreclosure furthermore i show that whether the access charge should be used to level or tilt the playing field in favour of the more efficient firm depends on the cost associated with non price discrimination

the regulation of multiproduct firms part ii applications to competitive environments and policy analysis abstract this paper extends our companion paper part i laffont and tirole 1990 on the regulation of the rate of return and prices of a multiproduct firm in two directions first it studies optimal pricing by a regulated firm competing with regulated or unregulated rivals with or without market power or other distorted pricing it then focuses on the access pricing problem and its potential foreclosure effects second it shows how optimal pricing can be decentralized to the regulated firm in the absence of cost and demand information

introducing a demand based electricity distribution tariff in the residential sector demand response and customer perception increased demand response is essential to fully exploit the swedish power system which in turn is an absolute prerequisite for meeting political goals related to energy efficiency and climate chan

knowledge is less power experimental evidence from residential energy use abstract imperfect information about product attributes inhibits efficiency in many choice settings but can be overcome by providing simple low cost information we use a randomized control trial to test the effect of high frequency information about residential electricity usage on the price elasticity of demand informed households are three standard deviations more responsive to temporary price increases an effect that is not attributable to price salience conservation extends beyond pricing events in the short and medium run providing evidence of habit formation and implying that the intervention leads to greenhouse gas abatement survey evidence suggests that information facilitates learning jel d12 d83 l11 l94 q41 q54

reducing household electricity consumption during evening peak demand times evidence from a field experiment abstract peak demand reduction is a key element in demand management programs targeting the stabilization of the electricity grid this study examines a field experiment in austria that investigated rebates and non monetary incentives to reduce household electricity consumption during evening peak demand times the experiment was conducted on 1 257 austrian households using a smart phone application and smart meter data recorded in 15 minutes intervals our results show the strongest behavioral change in households who received the monetary incentive with only weak evidence of changes in the non monetary treatment groups households reduced their consumption in response to the monetary incentive but were then subject to a substantial rebound effect whereby their electricity consumption increased overall

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

managing increasing environmental risks through agrobiodiversity and agrienvironmental policies abstract agro biodiversity can provide natural insurance to risk averse farmers by reducing the variance of crop yield and to society at large by reducing the uncertainty in the provision of public good ecosystem services such as e g co2 storage we analyze the choice of agro biodiversity by risk averse farmers who have access to financial insurance and study the implications for agri environmental policy design when on farm agro biodiversity generates a positive risk externality while increasing environmental risk leads private farmers to increase their level of on farm agro biodiversity the level of agro biodiversity in the laissez faire equilibrium remains inefficiently low we show how either one of two agri environmental policy instruments can cure this risk related market failure an ex ante pigouvian subsidy on on farm agro biodiversity and an ex post compensation payment for the actual provision of public environmental benefits in the absence of regulation welfare may increase rather than decrease with increasing environmental risk if the agroecosystems is characterized by a high natural insurance function low costs and large external benefits of agro biodiversity

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

the politics of government decision making a theory of regulatory capture the paper develops an agency theoretic approach to interest group politics and shows the following 1 the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation 2 the threat of producer protection leads to low powered incentive schemes for regulated firms 3 consumer politics may induce uniform pricing by a multiproduct firm 4 an interest group has more power when its interest lies in inefficient rather than efficient regulation where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal congress

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

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

concept and unintended consequences of weather index insurance the case of mexico recently weather index insurance wii has received considerable attention as a tool to insure farmers against weather related risks particularly in developing countries donor organizations local governments insurance companies development economists as well as agricultural economists are discussing the costs and benefits of wii while the literature on wii has mainly focused on many cases in africa and asia in this article we analyze the wii program in mexico which is one of the largest wii programs worldwide in this context we discuss potentially important spill over effects on related markets which so far have not been considered in the academic literature first we argue that wii creates disincentives to invest in other non insured crops leading to potential overspecialization and monoculture secondly wii generates disincentives to invest in irrigation systems because farmers are insured only as long as production takes place on non irrigated land third in case of catastrophic events food prices can potentially inflate with indemnity payments at the expense of the uninsured poor we also suggest that in mexico the thresholds of the weather index be continuously re calibrated in order to adjust for the development of drought resistant seeds finally the index could relatively easily be extended to account for precipitation variances we argue that these factors and spillover effects should be accounted for in cost benefit analysis of wii this abstract was borrowed from another version of this item

market failures and public policy industrial organization studies the exercise and control of market power to this purpose it builds models that capture the essence of the situation the predictions of the model can then be tested econometrically and possibly in the lab or the field in the end the reasonableness of and robustness to modeling assumptions and the quality of empirical fit determine how confident economists are in making recommendations to public decision makers for intervention and to companies for the design of their business model industrial organization has a long tradition first theoretical with the work of french engineer economists antoine augustin cournot 1838 and jules dupuit 1844 then policy oriented with the enactment of the sherman act 1890 and subsequent legislation then descriptive with the studies of the harvard school structure conduct performance comforting and refining the antitrust drive and finally skeptical with the chicago school the chicago school correctly pointed out the lack of underlying theoretical doctrine and went on to cast doubt on the whole edifice it however did not develop an alternative antitrust doctrine perhaps because

demand for a labor based drought insurance scheme in ethiopia a stated choice experiment approach index based weather insurance is increasingly used to manage weather related risks in smallholder agriculture however cash constrained smallholders often lack the resources to pay an insurance premium which may undermine its wider adoption this article investigates alternative insurance payment methods that may help to enhance the adoption of index based weather insurance we use a choice experiment to elicit smallholders willingness to pay in cash or labor for index based weather insurance in four districts in the south central highlands of ethiopia the insurance schemes were created using a fractional factorial design with three factors work cash and payout rate we analyze the choice data using a random parameter mixed logit model we find that the average participants need a subsidy to pay cash for insurance because their willingness to pay is less than the expected cost of the insurance on average they are willing to pay only 0 81 etb ethiopian currency to get an expected yearly payout of 1 etb however most are willing to participate in work for insurance programs at lower daily wage rates than is common for other work programs in ethiopia

how might climate change influence farmers demand for index based insurance the low observed uptake of non subsidised index based insurance policies in developing countries has been puzzling researchers for about a decade this paper analyses the role of drought frequency in farmers demand for index based insurance in developing countries while it is typically assumed that an increase in exposure to risk would result in higher demand for index insurance this paper finds the opposite an increase in drought frequency may result in lower demand for index insurance under fairly standard conditions in an expected utility model we show that the demand for insurance is an inverted u function of drought frequency we further show that downside basis risk decreases insurance demand under frequent drought conditions it implies that insurance against similar but more frequent events cannot meet large demand from farmers to check the empirical relevance of these effects we conduct an insurance field experiment in burkina faso with 205 farmers we analyse insurance demand for different drought frequencies different levels of basis risks and different loading factors through incentivised lottery choices this analysis confirms that for higher drought frequencies insurance demand is lower insurance demand also decreases with basis risk and the loading factor

move it how an electric contest motivates households to shift their load profile abstract photovoltaic systems generate electricity around noon when many homes are empty conversely residential electricity demand peaks in the evening when production from solar sources is impossible based on a randomized control trial we assess the effectiveness of alternative demand response measures aimed at mitigating these imbalances more precisely through information feedback and financial rewards we encourage households to shift electricity consumption toward the middle of the day using a difference in differences approach we find that financial incentives induce a significant increase of the relative consumption during the period of the day when most solar radiation takes place information feedback however pushes households to decrease overall consumption but induces no load shifting

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

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

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

do extrinsic incentives undermine social norms evidence from a field experiment in energy conservation policymakers use both extrinsic and intrinsic incentives to induce consumers to change behavior this paper investigates whether the use of extrinsic financial incentives is complementary to intrinsic incentives or whether financial incentives undermine the effect of intrinsic incentives we conduct a randomized controlled trial that uses information interventions to residential electricity customers to test this question we find that adding economic incentives to normative messages not only does not strengthen the effect of the latter but may reduce it these results are consistent with recent theoretical work that suggests a tension between intrinsic motivation and extrinsic incentives