Israel Finkelshtain

Marketed Surplus under Risk: Do Peasants Agree with Sandmo?

Using a newly defined notion of aversion to income risk, the behavior of the marketed-surplus producer under price risk is characterized. Unlike the familiar case first examined by Sandmo, output depends on both ordinal preferences for goods and on risk attitudes. Conditions are found that yield an output level under risk that is smaller than under certainty. If these conditions do not hold, both risk and risk aversion may have a positive effect on output. Implications for econometric studies of risk attitudes are considered and illustrated with an example. Finally, we examine the effect of uncertainty on the peasants long-run equilibrium.

On risk aversion with two risks

We consider necessary and sufficient conditions for risk aversion to one risk in the presence of another non-insurable risk. The conditions (on the bivariate utility function) vary according to the conditions imposed on the joint distribution of the risks. If only independent risks are considered, then any utility function which is concave in its first argument will satisfy the condition of risk aversion. If risk aversion is required for all possible pairs of risks, then the bivariate utility function has to be additively separable. An interesting intermediate case is obtained for random pairs that possess a weak form of positive dependence. In that case, the utility function will exhibit both risk aversion (concavity) in its first argument, and bivariate risk aversion (submodularity).

Prices versus Quantities: The Political Perspective

Regulation regimes subject to the influence of interest groups are compared. It is shown that the allocation of the regulated commodity varies with the implemented control and that the advantage of prices (vs. quotas) increases with the elasticity of the demand for or the supply of the commodity and decreases with the number of organized producers in the regulated industry. Control regimes can be ranked for negative, but not positive, externalities. Finally, a control regime leading to a more efficient commodity allocation also entails using fewer resources in rent-seeking activities.

On A Political Solution to the NIMBY Conflict

Scale economy in the construction and operation of public facilities, such as landfills, calls for cooperation among communities to build a common facility (Arthur O’Sullivan, 1993). Such a facility is a mixture of a public good and a private bad and, hence, leads to strong opposition by communities to locate it in their vicinity (Bruno S. Frey et al., 1996). This is one of the most serious environmental concerns of recent years, and is known as NIMBY: “not in my backyard.” In this paper we study the hypothesis that a democratic political process creates an adequate mechanism for the resolution of the NIMBY conflict. The intuitive explanation is simple. A NIMBY conflict is likely to induce lobbying and symmetric pressures by all threatened communities in the relevant region. As is well known (Gene M. Grossman and Elhanan Helpman, 1994), when subject to symmetric pressures, politicians stick firmly to principles and function most efficiently. The existing literature on the siting of noxious facilities focuses mainly on normative issues, such as welfare-maximizing siting via decentralized community-based mechanisms (e.g., Howard Kunreuther and Paul R. Kleindorfer, 1986; Robert C. Mitchell and Richard T. Carson, 1986; and Deborah Minehart and Zvika Neeman, 2002). Evidently, however, such mechanisms have seldom been practiced (e.g., Stephen K. Swallow et al., 1992). The current study adopts a positive approach, integrating a political-economic framework with a model of a competitive real estate market. In the theoretical section, a government of a linear two-city economy determines the location of a noxious facility, which affects the equilibrium in the real estate market and induces the spatial distributions of price and population. The government is subject to political pressures by city-level lobbies of landowners (both landlords and home owners). In general, the political equilibrium and the socially optimal siting differ. However, the more equitable the distribution of landownership in the region, the smaller the difference. At the limit, when property distribution is perfectly equitable and all cities participate in the political arena, the government locates the facility at the socially optimal site. The analysis proceeds by identifying additional conditions under which the political equilibrium siting coincides with the socially optimal location and, with an empirical analysis. In the empirical section, the theoretical framework is extended to account for a multiple-city region, and is calibrated to assess the prospects of the political system for resolving the NIMBY conflict in the context of landfill-siting in Israel. It is shown that if all cities in the region form political lobbies and the politicians are not extremely corrupt, the political siting is close geographically to the socially optimal location, and the difference entails a less than 0.1 percent reduction in social welfare. Moreover, even if the formation of lobbying in the region is incomplete, as long as the weight the politicians assign to social welfare is larger than 0.7, the proximity of the politically and socially optimal locations is preserved. We interpret the above results as supportive of the hypothesis of an effective political solution to the NIMBY conflict.

Two-moments decision models and utility-representable preferences

If a decision problem satisfies Meyers location-scale condition, then any utility-representable preferences are also representable by a mean standard deviation utility function. The properties of this function are inferred from common assumptions concerning the individuals risk preferences, without relying on the expected utility model or any of its substitutes.

The Economics of Collective Brands

We consider the consequences of a shared brand name such as geographical names used to identify high quality products, for the incentives of otherwise autonomous firms to invest in quality. We contend that such collective brand labels improve communication between sellers and consumers, when the scale of production is too small for individual firms to establish reputations on a stand alone basis. This has two opposing effects on member firms’ incentives to invest in quality. On the one hand, it increases investment incentives by increasing the visibility and transparency of individual member firms, which increases the return from investment in quality. On the other hand, it creates an incentive to free ride on the group’s reputation, which can lead to less investment in quality. We identify parmater values under which collective branding delivers higher quality than is achievable by stand alone firms.

Commodity Price Stabilization in a Peasant Economy

The peasant households preferences for price stabilization are shown to depend on observable parameters describing consumption and production decisions. A measure of willingness to pay is obtained for the case where the household is engaged in both the production and the consumption of the commodity in question. For plausible parameter values, it appears likely that the peasant household will prefer price stabilization and that stabilization of the producer price alone dominates complete stabilization. Copyright 1997, Oxford University Press.

Cross-Country Productivity Comparisons: The "Revealed Superiority" Approach

This paper proposes a novel non-parametric methodology for comparing total factor productivity (TFP) across countries and over time. It develops the principle of revealed superiority along the lines of Samuelsons principle of revealed preferences. Specifically, we compare the aggregate actual profits in each country to the hypothetical profits it would have earned if, facing its own prices, it had employed another countrys inputs and produced its output. We show that our procedure reveals the “true” TFP ranking under relatively mild assumptions. We apply our method by ranking a panel of the 25 richest economies relative to one another and over time and find that the United States enjoys the highest TFP whereas Singapore has the lowest.

Simple Nonparametric Tests of Technological Change: Theory and Application to U.S. Agriculture

Several nonparametric tests of technological change are proposed conditional on alternative maintained behavioral assumptions. The tests are simple as they require verification of axioms via binary comparisons that are analogous to those of the revealed preference theory. Our model allows a broad interpretation of technological changes, yet trivial rationalization of the data with either profit-maximization or cost-minimization behavior is excluded. The tests are applied to study the U.S. aggregate agricultural data, supporting the hypotheses of rankable and neutral Technological Variations. Copyright 1999, Oxford University Press.

Framing the Allais paradox as a daily farm decision problem: tests and explanations

The well-known Allais paradox is reformulated as a daily farm decision problem. Only 26% of the farmers exhibit violations of the expected utility hypothesis. Moreover, the tendency for violation decreases with the farm operators education, experience and family size. No effects of the farm main crop or its scale were detected. Finally, when taking into account the possibility of choice errors, we find that the violation rate is statistically insignificant.