Price Uncertainty and the Bias in Food Policy Analyses

This paper extends Gardner's model of farm-retail price transmission to incorporate marketing firms' risk preference. The model developed allows examining the bias in policy analyses resulting from using a deterministic framework when uncertainty in output price is present. The farm programs examined include the consumption promotion program, food price control program and price support with production control. Results indicate that the direction of bias depends largely on the policy evaluated and the marketing firm's risk preference. While impact of the consumption promotion program will be overestimated when the majority of the marketing firms exhibit risk averse behavior, the certainty model will yield downward-biased estimates of the impacts of the other two programs.