ENDOGENOUS POLICY FORMATION IN THE IMPERFECT WORLD WHEAT MARKET
Abstract
Public agencies are not price-takers in the world wheat market, rather policies are designed to redistribute income among various political interest groups. It has also been argued that both exporting and importing countries exercise market power. A game theory model of the world wheat market is developed which recognizes the manipulative behavior of public agencies. Using a criterion function for the policymaker in each major wheat trading country which allows for differing political influence among interest groups, six policy instruments are endogenized. A revealed preference methodology is used to establish the relative influence of each political interest group. Cross-country policy adjustment and retaliation is treated as a game where each policymaker maximizes its welfare contingent upon conjectures of rivals' responses to policy changes in order to endogenously determine the policy instruments. The revealed preference results show that political interest groups exert differing influence over time. Empirical analysis of these countries' conjectures of others' behavior show that anticipated and actual behavior differ. Relative to its neo-classical counterpart, the game theory model's predictions of quantities and prices have lower errors. Comparative statics analyses are performed for several scenarios, including a U.S. crop shortfall, changes in the influence of various U.S. political interest groups, a reduction in the E.C. threshold price of wheat, and an export cartel. The results of these scenarios illustrate the differing predictions of the game theory model relative to the neo-classical model, and suggest the model provides a more complete understanding of the policy formation process in the wheat market.
Degree
Ph.D.
Subject Area
Agricultural economics
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