1. •“Agronomic Weather Measures in Econometric Models of Crop Yield with Implications for Climate Change.”  with Wolfram Schlenker and Jonathan Eyer.
   

ABSTRACT:  In this article we extend earlier statistical analysis of crop yields in relation to nonlinear weather by considering another measure derived from crop physiology: vapor pressure deficit (VPD). VPD is closely related to relative humidity and influences evaporation, evapotranspiration and soil moisture. It is also closely associated with diurnal temperature variation (the difference between daily minimum and maximum temperatures), which is in turn associated with cloud cover and solar radiation, all of which factor into photosynthesis. We find this measure is strongly associated with extreme heat (degree days above 29C) and, when used in regression analysis, significantly improves corn yield predictions for Illinois. Possible implications for projected climate changes are discussed.

1. •“Optimal Sequential Plantings of Corn and Soybeans Under Price Uncertainty” with Michael Livingston and Yue Zhang.
   

ABSTRACT: We examine crop choice and fertilizer applications as the solution to stochastic dynamic optimization problem for an infinite stream of discounted profits. The efficient decision rule depends on the stochastic evolution of commodity prices, fertilizer prices, and the agronomic effects of rotation versus monoculture.  This decision rule includes an account of real option values associated with maintaining soil quality and disposition in an environment with highly uncertain future prices and irreversible past planting decisions.  We parameterize a baseline model for a representative acre in Iowa and compare the model's predictions and profits to relatively naive, shorter-horizon decision rules, and a field managed with optimal fertilizer applications conditional on corn and soybeans always being rotated. We also examine the effects of a permanently larger premium on corn prices relative to soybean prices, which has been observed in locations near recently established ethanol plants.   We then compare the various decision rules to actual crop choices in a panel of over 6500 Iowa plots during 1979-2007.  As compared to less forward-looking objectives, we generally find the agronomic benefits of rotations coupled with real option values leads to a much more inelastic response of planting decisions to both transitory and permanent price changes. Always rotating, regardless of prices, is extremely close to optimal.

1. •“Separating Moral Hazard from Adverse Selection: Evidence from the U.S. Federal Crop Insurance Program”  with Nigel Key and Erik O’Donoghue.
   

ABSTRACT:  We use data from the administrative files of the U.S. Department of Agriculture's Risk Management Agency to examine how the distribution of crop yields changed as individual farmers shifted into and out of the federal crop insurance program. The large panel facilitates use of fixed effects that span each combination of farmer and production practice to account for unobserved differences in farmer abilities, risk preferences and soils, in addition to fixed effects for interactions between all years and all counties to account for geographically-specific technological change, local prices, and weather.  We also account for farm-specific yield variances.  Conditional on this large set of fixed effects, we estimate the mean shift in yield and non-parametrically estimate the shift in the distribution around the conditional mean associated with enrollment in crop insurance.  Because differences between farmer and land types have been accounted for (i.e., controlling for adverse selection), the estimated shifts in yield distributions likely reflect moral hazard.  For most crops in most states we find insurance is associated with statistically significant but small downward shifts in average yield.  The largest shifts occur for cotton and rice, the highest-value of five crops considered. By integrating the estimated shift in yield distributions over actual indemnities paid, we provide estimates of the total indemnities paid due to moral hazard. Our results indicate moral hazard accounted for an estimated $53.7 million in indemnities between 1992 and 2001, which amounts to 0.9% of indemnities paid to the insured crops and states considered.

1. •“Using Quotas to Enhance Competition in Asymmetric Auctions: A Comparison of Theoretical and Experimental Outcomes” with Daniel Hellerstein and Nathaniel Higgins.
   

ABSTRACT:  We study multiple-unit asymmetric procurement auctions wherein sellers from two classes draw costs from different distributions. When sellers are asymmetric, a cost-minimizing buyer discriminates among classes of sellers to enhance competition. Establishing a quota---a limit on the number of offers that can be accepted from any one class---discriminates simply and effectively. The quota increases demand scarcity from the perspective of low-cost sellers, which causes them to lower their offers.  To solve for approximate equilibrium strategies of asymmetric auctions with and without a quota, we develop a new method that is similar but distinctly different from the constrained strategic equilibrium (CSE) approach. The new method finds the constrained strategies that minimize the expected gain from a randomly chosen seller unilaterally deviating from the constrained strategy.  We find quota can enhance competition and lower total procurement cost. We subject the same auctions to laboratory testing and find savings from quota in excess of that predicted by the approximate equilibrium strategies. This study is first to combine theory and experimental evidence of auctions with quotas, though similar mechanisms are widely used in practice.  Because the mechanism is widely used to promote social goals and can also lead to better outcomes for the buyer, our findings have both positive and normative implications.  One potentially interesting application of quota auctions would be for large-scale  procurement of ecosystem services like carbon sequestration.

1. •“Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the US Ethanol Mandate” with Wolfram Schlenker. (Revise and resubmit, American Economic Review)
   

ABSTRACT:  We present a new framework to identify demand and supply elasticities of agricultural commodities using yield shocks---deviations from a time trend of output per area, which are predominantly caused by weather fluctuations. Demand is identified using current-period shocks that give rise to exogenous shifts in supply. Supply is identified using past shocks, which affect expected future prices through inventory accretion or depletion. We use our estimated elasticities to evaluate the impact of ethanol subsidies and mandates on world food commodity prices, quantities, and food consumers' surplus. The current US ethanol mandate requires that about 5 percent of world caloric production from corn, wheat, rice, and soybeans be used for ethanol generation. As a result, world food prices are predicted to increase by about 30 percent and global consumer surplus from food consumption is predicted to decrease by 155 billion dollars annually. If a third of the biofuel calories are recycled as feed stock for livestock, the predicted price increase scales back to 20 percent. While commodity demand is extremely inelastic, price response is muted by a significant supply response that is obscured if futures prices are not instrumented. The resulting expansion of agricultural growing area potentially offsets the CO2 emission benefits from biofuels.

1. •“Do Decoupled Payments Stimulate Production?  Estimating the Effect on Program Crop Acreage Using Matching” with Nigel Key.
   

ABSTRACT:  Abstract. The extent to which decoupled government payments influence agricultural production has important implications for international trade policy. This study applies propensity score matching to farm and ZIP code-level panel data from the U.S. Agricultural Census to evaluate the effect of decoupled payments on crop acreage. The study compares the change between 1997 and 2002 in the program crop acreage of farmers receiving high levels of decoupled payments in 1997 to the change in acreage of similar farmers receiving low levels of payments. For continuing operations, results are consistent with earlier cross-sectional estimates and suggest a small but statistically significant farm-level response to payments. When aggregated to ZIP codes, however, the estimated supply elasticity is substantially larger than previous estimates and potentially economically significant in scale.  Matching and OLS results are similar once outlying high-leverage observations are accounted for.