Economics

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The behavioral tendency to overestimate probabilities of loss can affect a farmer's participation in water markets. We examine this issue with a theoretical model of a nonexpected utility maximizing farmer who places subjective weights on the actual probabilities of loss of water rights due to market transactions. The farmer bargains over sharing of surpluses with the buyer of water. The farmer then incorporates the bargaining outcome in his intertemporal expected benefit maximization problem that accounts for the possible loss of water rights due to its sale out of agriculture. Three key results emerge. First, subjective weighting of probabilities leads to discounting of resources when farmers overestimate probabilities of loss. Second, if farmers have idiosyncratic time preferences, total water supply in the market would depend on the level of heterogeneity in the population. Third, considering the case of two farmers, we find that the farmer with lower endowments bears the burden of risk reduction, whereas the one with higher endowments sells more water for profits. As the level of risk increases, however, the relative difference in risk sharing declines. Copyright 2006 by the American Geophysical Union.

(SoHSS) School of Humanities and Social Sciences

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Water Resources Research

How probability weighting affects participation in water markets

This paper estimates the expected annual impacts of the Pink Hibiscus Mealybug infestation on the economies of Florida and the rest of the United States. The approach involves a Markov chain analysis wherein both short run and long run expected damages from infestation are calculated. Use is made of the CLIMEX model that predicts the potential pest-establishment regions in the US. While predictions based upon the CLIMEX model extend the scope of damages beyond Florida, the damages are significantly dependent upon the rate of arrival and detection of species in those regions. Damages are significantly higher when a longer time horizon is considered. When nursery owners bear the full cost of quarantines in the form of loss of sales and treatment costs of infected plants, the cost-effectiveness of quarantines as a regulatory tool is diminished. The long run propensity of the system, in terms of the fraction of time spent in the possible 'states' of infestation and control, determines the extent of damages, and not the annual value of crops that could be potential hosts to the pest. © Springer-Verlag 2006.

Stochastic Environmental Research and Risk Assessment

Economic impacts of Pink Hibiscus Mealybug in Florida and the United States

We examine the management of livestock diseases from the producers' perspective, incorporating information and incentive asymmetries between producers and regulators. Using a stochastic dynamic model, we examine responses to different policy options including indemnity payments, subsidies to report at-risk animals, monitoring, and regulatory approaches to decreasing infection risks when perverse incentives and multiple policies interact. This conceptual analysis illustrates the importance of designing efficient combinations of regulatory and incentive-based policies.

A model of producer incentives for livestock disease management

This paper models investment/entry decisions in a competitive industry that is subject to a quantity control, either on output or on a production input. The quantity control is implemented via the sale of licenses for the restricted output/input. We show that liberalizing the quantity control could reduce investment in the industry under certain circumstances. Furthermore, the level of investment in the industry is different depending on whether the licenses are tradable or not. Key factors to consider are the elasticity of demand for the final good and the degree of input substitutability. Two examples are presented to illustrate the results.