David E. Buschena

Do Voluntary Biotechnology Labels Matter to the Consumer? Evidence from the Fluid Milk Market

This article examines the effects on the demand of voluntary labeling for the use of genetically modified growth hormone for retail fluid milk using supermarket scanner data. Retail fluid milk tracks one of the first biotechnology products approved, is fairly standardized and ubiquitous, and allows for cross-sectional differentiation between labeled and unlabeled products and between conventional and organic brands. The results indicate that voluntary labeling increases the demand for recombinant bovine growth hormone free milk. In addition, the estimated effects of labeling appear to have increased over time.

Testing the Effects of Similarity on Risky Choice: Implications for Violations of Expected Utility

Our aim in this paper was to establish an empirical evaluation for similarity effects modeled by Rubinstein; Azipurua et al.; Leland; and Sileo. These tests are conducted through a sensitivity analysis of two well-known examples of expected utility (EU) independence violations. We found that subjective similarity reported by respondents was explained very well by objective measures suggested in the similarity literature. The empirical results of this analysis also show that: (1) the likelihood of selection for the riskier choice increases as the pair becomes more similar, (2) these choice patterns are consistent with well-known independence violations of expected utility, and (3) a significant proportion of individuals exhibit intransitive choice patterns predicted under similarity effects, but not allowed under generalized expected utility models for risky choice.

Performance of the similarity hypothesis relative to existing models of risky choice

Experimental studies have discovered behavior that is inconsistent with the expected utility model (EU) of risky choice (von Neumann and Morgenstern, 1953). The two approaches to address these paradoxes are tested: generalized expected utility models (GEU) and models incorporating decision-making limits or costs through question similarity. Tests are carried out over risky pairs related to well-known examples from Kahneman and Tverskys (1979) influential work. Statistical analysis reveals that GEU models of choice are significantly violated for choice patterns consistent with the similarity hypothesis. Additional tests point to shortcomings in the similarity approach that are consistent with fanning out behavior.

(How) Do Prerequisites Matter? Analysis of Intermediate Microeconomics and Agricultural Economics Grades

Success in intermediate economics and agricultural economics classes with respect to course prerequisites was evaluated. Prerequisites were statistically important for both intermediate microeconomics andin two of the three agricultural economics courses evaluated. The primary finding was that—for three of the four courses evaluated—the higher the proportion of students who completedthe listed prerequisite, ceteris paribus, the lower the grade for any given student. Results also indicate that students with higher ex ante GPAs, andto some extent higher math equivalent SAT scores, received higher grades.

Non-Expected Utility: What do the Anomalies Mean for Risk in Agriculture?

After more than a quarter century of analysis into its predictive value, the validity of the expected utility model (EU) is seriously called into question. These questions are particularly critical for agricultural economists since we have long relied on EU to assess behavior under the pervasive environment of risk in agricultural and natural resource issues. In this chapter, I will review some of the primary violations of EU, assess their implications, and consider various responses put forward in light of them. Questions addressed include: What is the nature of behavior violating EU as commonly applied? What do these anomalies tell us about modeling behavior under risk and what testable implications can be drawn from models incorporating them? Can we still use EU for some risky choices in light of these anomalies; i.e., how robust are the anomalies to (1) the design of the risky questions, (2) real payoffs, and (3) experimental vs. non-experimental risky questions?

Evaluating the magnitudes of financial transactions costs on risk behavior

Abstract The model presented in this paper relies on financial constraints and transactions costs to operationalize model of behavior akin to safety rules. The decision maker is taken to maximize long term (40 period) expected wealth in the presence of financial transactions costs. The model allows exploration of the implications of these constraints and transactions costs for measurable choice patterns over risk. The optimization analysis demonstrates very rich behavior despite the restrictive assumption of risk neutral preferences. The optimal decisions show instances of “risk aversion” with willingness to pay less than a risky options expected value, and of “risk preference” or plunging with willingness to pay greater than a risky options expected value. These varied behavioral patterns in the presence of risk depend on the individuals financial standing, the magnitude of the random outcomes, the underlying distribution, and the farm policy environment.

Trade Liberalization and International Mergers: The Case of Barley Malting in North America

As free trade policy merges formerly distinct markets characterized by stable Cournot oligopolies and having similar cost structures, additional incentives are created for mergers within the newly combined industry that affect the gains from free trade. We use a Cournot-Nash oligopoly model to examine the incentives for malting company mergers following Canadian-U.S. free trade agreement. Mergers reduce free trade gains to malt consumers and malt barley producers while producer surplus in the malting industry increases. Overall, mergers increase the total gains from free trade beyond those without mergers.

Testing the Effects of Similarity and Real Payoffs on Choice

Tversky’s contributions to economic modeling of risk provided a criticism of Expected Utility (EU) so strong that it could not be ignored. In particular, Kahneman and Tversky’s 1979 Econometrica paper helped to build an emerging set of literature (see also MacCrimmon and Larsson, 1979) by demonstrating the power of well-executed experiments, eliciting stable choice patterns that provide undisputed evidence of the limitation of choice models using complete rationality under EU. Unlike those in Allais (1953, 1979) that identified extreme situations — an exception that did not change the rule — Kahneman and Tversky’s experiments addressed “real life” decisions, and as a result changed risky choice modeling.