James Vercammen

Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets

Welfare-increasing reputation effects arise in credit markets when adverse selection gives rise to borrower reputation formation incentives that mitigate moral hazard problems. This paper shows that welfare stemming from reputation effects will diminish over time as the private information of borrowers is revealed to lenders in the form of lengthening credit histories. Aggregate borrower welfare may, therefore, decrease over time unless reputation effects can be sustained. Restricting a lenders access to a borrowers credit history via credit bureau policy is shown to be one method of sustaining reputation effects and preventing a decline in welfare. Copyright 1995 by The London School of Economics and Political Science.

Moral Hazard Cycles in Individual-Coverage Crop Insurance

This paper examines the moral hazard implications of individual-coverage crop insurance contracts. Individual-coverage contracts are informationally superior to standard contracts because the farmers coverage is proportional to his average historical yield. Despite this apparent benefit, the steady-state solution is shown to be characterized by moral hazard cycles, where moral hazard is practiced in alternative periods. The amplitude of the cycle and, thus, the variability in planned production is shown to be larger the lower the degree of production uncertainty, the fewer the number of years used in the averaging process, the higher the coverage threshold, and the lower the level of co-insurance.

Nonlinear Pricing Schemes for Agricultural Cooperatives

Standard pricing practices are generally not efficient for a cooperative. Sexton (1986) suggests that membership fees/rebates can be used to facilitate efficient pricing, but such schemes may not be feasible because of membership heterogeneity and information asymmetries. In this paper a constrained efficient pricing rule for a cooperative is derived that explicitly addresses the heterogeneity and information constraints. The optimal rule generally entails nonlinear pricing which, for the case of a farm purchasing cooperative, entails a higher average price for higher delivery volumes. The constrained efficient rule is modified to distribute the benefits more evenly over the cooperatives membership. Copyright 1996, Oxford University Press.

Constrained Efficient Contracts for Area Yield Crop Insurance

With area yield crop insurance, indemnification occurs when area yield falls below a yield trigger that is chosen by the producer. The maximum value for this yield trigger is generally restricted (e.g., 80% of the long term area average yield). The impact of this trigger constraint on the optimal design of an area yield insurance contract is examined. Within the constrained efficient contract, indemnities consist of both a lump sum payment and a payment that is proportional to the yield shortfall. Because lump sum payments may not be feasible to implement, efficiency-enhancing modifications to standard contracts are also proposed. Copyright 2000, Oxford University Press.

Supply management and import concessions

Countries such as Canada, which manage domestic supply by regulating both production and imports, have come under pressure in recent years to liberalize their trade policy. This paper examines the effect of import concessions on the distribution of rents in supply-managed industries. Although import concessions decrease producer welfare, it is shown that rather sizable concessions may occur before producers are worse off under supply management than free trade. This is especially true in industries characterized by a low free-trade import share and inelastic demand. With regard to net social welfare, policies that are designed to transfer market rents to producers through supply management incur larger deadweight losses when they also incorporate import concessions.

Hedging with Commodity Options When Price Distributions are Skewed

Lapan, Moschini, and Hanson have demonstrated that commodity options can be useful for hedgers who face a symmetric price distribution and who wish to maintain a net open market position. This is because options skew the distribution of profits to the right and such skewness typically increases expected utility. In this paper I use standard comparative statics to show that options are relatively more valuable for reducing the skewness of a nonsymmetric price distribution. Depending on the direction of the skewness and the underlying price expectations, hedgers may write options as well as purchase them.

Irreversible investment under uncertainty and the threat of bankruptcy

Abstract The firm-level theory of irreversible investment under uncertainty is extended to account for bankruptcy. With a sufficiently large risk of bankruptcy, firms prefer to defer their investment decision to a later date. Simulated option values reach as high as 30 percent.

Efficiency of Farm Programs and Their Trade-Distorting Effects

Government intervention in product and factor markets generally leads to trade distortions. Conventional measures of government intervention, such as the Producer Subsidy Equivalent and the Nominal Rate of Protection, are often used to compare the effects of alternative policies on trade. This chapter demonstrates that the size of a trade distortion is often not closely linked to the level of producer support or protection but is closely related to a more fundamental variable—the economic efficiency of a government program. The trade-distorting policies can generally be ranked; the least efficient policies are the most trade distorting, and the most efficient policies are the least trade-distorting. An empirical examination of several important policies in Canada and the United States reveals that the efficiency criteria we propose can consistently rank policies according to their trade-distorting effects whereas more conventional measures, such as the Producer Subsidy Equivalent and Nominal Rate of Production, often fail to measure trade distortions.

Agricultural marketing: structural models for price analysis.

1. Introduction 2. Prices Over Space 3. Prices Over Time (Storage) 4. Prices Over Time (Commodity Futures) 5. Prices Over Form (Quality) 6. Prices Linkages Across Commodity Markets 7. Marketing Margins in Vertical Supply Chains 8. Auctions and Competitive Bidding 9. Bargaining In Bilateral Exchange

Portfolio Speculation and Commodity Price Volatility in a Stochastic Storage Model

Simulated prices from a stochastic storage model are used to examine the price impacts of speculation by rational investors who diversify their financial portfolios by holding agricultural commodity futures. The main result is that rather than destabilizing commodity prices, as is commonly believed, portfolio speculation actually reduces price volatility. Portfolio speculation can potentially destabilize a commoditys price because the additional demand for long futures by speculators is expected to drive up the cash price during both periods of low net demand, when the cash price is below average, and periods of high net demand, when the cash price is above average. Our theoretical analysis demonstrates that the higher level of inventory that is associated with portfolio speculation results in a larger release of stocks during periods of high net demand. The price simulations reveal that this stock adjustment effect is strong since overall price volatility is smaller rather than larger with portfolio speculation.