Last updated on September 13, 2015
I have recently finished working on a new working paper titled “Attitudes to Price Risk and Uncertainty: The Earnest Search for Identification and Policy Relevance,” coauthored with my PhD student Yu Na Lee.*
In that paper, we first review the relatively small literature studying the effects of price risk and uncertainty on consumers, producers, and households. Then, we discuss the potential of experimental economics in identifying price risk preferences and of behavioral economics in developing theoretical models that are closer to how people actually behave. In doing so, we wanted to lay out a future research agenda on price risk.
Here is the abstract:
After several decades of neglect, the food crises of 2007-2008 and 2010-2011 have brought food price volatility back on the policy agenda. The study of price volatility, however, is really the study of price risk and uncertainty as they relate to individuals, households, and firms. Because the study of behavior in the face of risk and uncertainty has mostly focused on behavior in the face of income risk and uncertainty, we first review the theoretical and empirical literatures on behavior in the face of price risk and uncertainty. Then, because policy recommendations are only as good as the empirical findings on which they are based, and because market-level phenomena such as price risk do not lend themselves to randomization, we discuss the many ways in which experimental economics can inform our understanding of price risk. Finally, because expected utility–the workhorse model used to study behavior in the face of risk and uncertainty–fails to account for a number of behaviors, we discuss how insights from behavioral economics could be incorporated into the study of price risk, with the ultimate goal of generating more policy-relevant findings.
* This paper is a kind of homage to some of the scholars who have shaped my thinking. The title of the paper is a nod to Jean-Louis Arcand, whose undergraduate development economics class made me want to become a development economist when I took it in 1996. (It turns out that Jean-Louis in turn got the “earnest search” expression from Gustav Papanek.) The organization of the behavioral part of the paper is a nod to Ted O’Donoghue, whose graduate psychology and economic theory class was similarly organized when I took it in 2003. Though I am not a behavioral economist by any stretch of the imagination, Ted’s class was a huge influence on how I approach theorizing.