Journal of agricultural economics research

46 Pages·1994·3.3 MB·English

by  United States. Department of Agriculture. Economic Research Service

Historic, archived document
Do not assume content reflects current
scientific knowledge, policies, or practices.

Vol. 45, No. 2, Summer 1994
United States Economic
Department of Research
Agriculture Service
Articles
Setting Research Priorities in the Public Sector:
A AARC
Suggested Framework for the Center
Estimating the U.S. Demand for Sugar in the
Presence of Measurement Error in the Data
Price Elasticities Implied by Homogeneous
Production Eunctions
Book Reviews
Vegetable Markets in the Western Hemisphere
Selected Writings ofKarl Fox
Editors Contents
James Blaylock
David Smallwood
1 In This Issue
Managing Editor James Blaylock
Jack Harrison
David Smallwood
Graphics Designer
Susan Yanero Articles
Editorial Board
Ron Fecso 3 Setting Research Priorities in the Public Sector:
William Kost A Suggested Framework for the AARC Center
Fred Kuchler Doug Beach and Jorge Fernandez-Cornejo
Bob Milton
Kenneth Nelson
Mindy Petrulis
Gerald Schluter 17 Estimating the U.S. Demand for Sugar in the
Shahla Shapouri Presence of Measurement Error in the Data
Noel Uri
Noel Uri
Gene Wunderlich
This periodical is published 31 Price Elasticities Implied by Homogeneous
quarterly. Subscriptions are $16 Production Functions
for 1 year. Non-U.S. orders, Michael Price
please add 25 percent. Send check
or money order (payable to ERS-
NASS)
to:
ERS-NASS Book Reviews
341 Victor}^ Dr.
Herndon, VA 22070 34 Vegetable Markets in the Western Hemisphere
or call 1-800-999-6779. This
Reviewed by A. Desmond O’Rourke
periodical is also available from
the U.S. Government Printing
Ofrice-[phone]. 35 Demand Analysis, Econometrics, and Policy
Models: Selected Writings by Karl A. Fox
The Secretary of Agriculture has
Reviewed by Henry W. Kinnucan
determined that the publication
of this periodical is necessary in
the transaction of public business
required by law of this Depart-
ment. Use of funds for printing
this periodical has been approved
by the Director, Office of Manage-
ment and Budget.
Contents of this journal may be
reprinted without permission, but
the editors would appreciate ac-
knowledgment of such use.
The United States Department of
Apiculture (USDA) prohibits dis-
crimination in its programs on
the basis of race, color, national
origin, sex, religion, age, dis-
ability, political beliefs, and mari-
tal or familial status. (Not all
prohibited bases apply to all pro-
grams.) Persons with disabilities
who require alternative means for
communication of program infor-
mation (braille, large print, au-
diotape, etc.) should contact the
USDA Office of Communications
at [phone] (voice) or (202)
720-7808 (TDD).
To file a complaint, write the
Secretary of Agriculture, U.S. De-
partment of Agriculture, Wash-
ington, D.C., 20250, or call (202)
720-7327 (voice) or (202)
720-1127 (TDD). USDA is an
equal employment opportunity
employer.
In This Issue
There need be no conflict between theory and of inaccuracy in the price data for substitute
statistical analysis in the field of demand and sweeteners on the estimation of the demand for
prices. They are both essential. And they need to sugar. Two diagnostics are introduced to assess the
march hand in hand. Frederich V. Waugh, De- impact of measurement error on the estimated
mand and Price Analysis, 1964 coefficients. Uri suggests that measurement error
in the price of sweetener substitutes has led to
over-estimation of the response of sugar quantity
The seal of true science is the confirmation of its demanded to changes in soft drink sales and
forecasts; its value is measured by the control it personal disposable income. He finds this bias for
enables us to exercise over ourselves and our both beverage sugar and nonbeverage sugar
environment. Henry L. Moore
demand.
In a recent issue of this journal, Jet Yee found
substantial returns to both public and private Another assumption commonly employed in
investment in agricultural research. But not all economic models of production is that the produc-
research activities yield positive returns and some tion function is homogeneous. Price investigates
are better suited to public rather than private the theoretical implications of this assumption for
investment. Consequently, there is often a need to elasticities of input demand. He first notes, as
many others have, that the degree of homogeneity
prioritize prospective research projects which com-
pete for federal research funds. Beach and must be less than one for a unique, profit-
Fernandez-Cornejo examine the issue of prioritiz- maximizing solution for a firm. He finds that the
homogeneity assumption restricts the range of
ing projects competing for government support by
the Alternative Agriculture Research and Com- input demand elasticities to the elastic region
mercialization (AARC) Center. The 1990 Farm Bill when the degree of homogeneity is less than one.
provided for the establishment of the AARC Center Furthermore, the input demand elasticity will be
to develop and produce marketable products other constant and equal for all inputs used in produc-
tion. Consequently, the homogeneity assumption
than food, feed, or traditional forest or fiber
products, and to direct research and commercial- may not be appropriate for some empirical
analyses.
ization efforts towards commodities that can be
raised by family-sized agricultural producers. The
AARC Center can provide financial incentives in
Henry Kinnucan and Desmond O’Rourke write
the form of loans, interest subsidies, venture
capital and repayable grants that are matched by glowing, provocative reviews of two edited vol-
umes. O’Rourke reviews a recent volume edited by
private and local funds. This paper develops a
Lopez and Polopolus entitled “Vegetable Markets
pragmatic, three-phased, scoring model to evaluate
and prioritize AARC Center proposals. in the Western Hemisphere.” The book, reports
O’Rourke, is an outcome of a conference held in
1988 at Rutgers University, and is an excellent
Economists often employ econometric models to exploration of the major influences shaping vegeta-
quantify impacts of actual or proposed programs. ble markets in the Western Hemisphere and,
How well this can be done is often a bone of perhaps, around the world. O’Rourke is quite
contention. Those conducting and reporting the complimentary to the conference organizers for
analyses seldom emphasize the limitations or their insight into choosing speakers as well as to
degree of uncertainty surrounding their estimates. the speakers themselves. His only criticism is the
When they do, it tends to focus on statistical fact the conference occurred in 1988 and was
confidence intervals derived from their models. unable to consider major developments such as
Unfortunately, these confidence intervals assume GATT and NAFTA.
that the models accurately represent the real
world including all the underlying assumptions. Of
course, the assumptions are not always in close Kinnucan reviews the book “Demand Analysis,
proximity with reality. For example, classical Econometrics, and Policy Models: Selected Writ-
regression analysis requires that the explanatory ings by Karl A. Fox.” Kinnucan thinks the volume,
variables be measured without error. If random edited by Johnson, Sengupta, and Thorbecke, will
error is present in the data, then the regression provide many hours of engaging reading to people
estimator is biased. Uri investigates the potential who like to study a subject area through the greats
1
of the profession. He adds that the collection of the “grace and clarity that is at once refreshing
writings will be especially helpful to students of and enlightening.” A strong recommendation
agricultural price analysis because it focuses on indeed.
issues of enduring interest, such as model specifi- James Blaylock
cation, simultaneity, and measurement error, with David Smallwood
2
Setting Research Priorities in the Public Sector
A Suggested Framework for the AARC Center
E. Douglas Beach and Jorge Fernandez-Cornejo
Abstract. An argument can be made for public of agricultural commodities; and direct research
support of pre-commercial research and develop- and commercialization efforts toward agricultural
ment (R&D) when private industry, acting in commodities that can be raised by family-sized
response to market incentives, underinvests in agricultural producers (See appendix). Fulfillment
socially desirable projects. Research projects meet- of subtitle G is to be directed by the AARC Center.
ing this criterion must still compete for scarce
public funds. The Alternative Agriculture Research
and Commercialization (AARC) Center was man- The Center may provide financial assistance in the
R&D
dated by Congress to support pre-commercial form of loans, interest subsidy payments, venture
in new uses of agricultural commodities. This capital, and repayable grants. The AARC Center
article develops a three-phase scoring model to may also establish peer review committees with
evaluate and prioritize AARC Center proposals. agricultural, scientific, technical, or other exper-
tise, whose duties shall be to provide analysis and
recommendations, on scientific, technological, and
Keywords, pre-commercial R&D, market failure, policy matters. Thus, the legislation explicitly
AARC Center. encourages the Center to review all prospective
programs and projects. Peer review is a necessary
first step in preventing the AARC Center from
As budgets tighten in all levels of government, adding to the widely publicized government “pork
public agricultural research systems are being barrels” of the past (Cohen and Noll, 1991).
asked to do more with less. The study of economics
involves the assessment of alternative investments
given scarce funds, so economists are well-suited to This article develops a three-phase scoring frame-
assist researchers with priority-setting methods work to help guide the peer review process for the
and processes. As Stuby (1991) observes, priority AARC Center. The first phase involves an initial
setting in general “is a legitimate part of positivis- screening of applications to ensure compliance
tic, rationalistic science and management.” He with the basic program. The principal investigators
adds, however, that not all priority setting is of those applications that meet the basic require-
rational or positivistic. Generic, systemic problems ments are contacted for a more complete proposal
must be resolved, including the difficulty of in phase 2. Those proposals that are “recom-
reducing complex issues to their elemental proper- mended highly” or “recommended with comments”
ties and of ordering multidimensional projects. in phase 2 would be evaluated in phase 3. The
Multidimensionality is of particular concern in highest ranked proposals in phase 3 are desig-
agricultural research given the unidimensional nated as semi-finalists and their ranking submit-
character of most priority-setting procedures. This ted to the Board. Funding decisions would then be
article examines these issues with respect to the made by the Board.
newly established Alternative Agricultural Re-
search and Commercialization (AARC) Center.
The evaluation criteria developed here borrows
from methods used by various USDA organizations
The 1990 Farm Bill (title XVI, subtitle G) provides (Agricultural Research Service, Cooperative State
government support for “pre-commercial” develop- Research Service, Cooperative State Research
ment of nonfood and nonfeed uses of agricultural Service/Small Business Innovation Research Pro-
commodities. The stated purpose of subtitle G is to gram, Economic Research Service, and Office of
help develop and produce marketable products Energy); other Federal Government departments
other than food, feed, or traditional forest or fiber (Department of Commerce/Advanced Technology
products; commercialize new nonfood, nonfeed uses Program, Department of Commerce/Engineering
Research Centers, and Department of Energy);
Beach and Fernandez-Cornejo are agricultural economists with State organizations (the Ben Franklin Part-
the Resources and Technology Division, ERS. The authors nerships in Pennsylvania and the North Carolina
express their gratitude for helpful comments from J. Alston, G. Experiment Station); and private industry (Archer
Gajewski, L. Glaser, M. Ollinger, N. Uri, and two anonjonous
reviewers. Daniels Midland and Farmland Industries).
THE JOURNAL OF AGRICULTURAL ECONOMICS RESEARCIWOL. 45, NO. 2 3
i
An Economic Rationale for depreciation, and direct subsidies have been used
Government Support of Research to promote technology development and diffusion.
and Development Similarly, the EC has promoted collaborative R&D
under the Framework Program. The Framework
The United States is a strong net exporter of Program is scheduled to allocate $8.4 billion
technology, leading the world in the number of between 1990 and 1994.
patents, licenses, fees, and other transactions. As
of 1989, the United States had a net surplus of Nevertheless, not all collective research efforts in
$1.3 billion in its technological balance of pay- Japan and Europe, particularly those subsidized
ments (National Academy of Sciences, 1992). by the central government, have been successful.
Despite years of effort, Japan has failed to gain a
Yet, when it comes to manufacturing technologies, major foothold in the U.S.-dominated pharmaceuti-
data suggest that U.S. firms may lag behind some cal industry. Similarly, Europe’s heavily subsidized
foreign competitors in the rate of adoption and the electronics industry has failed to close the gap
intensity of utilization of new technologies. Daniel with the United States. Therefore, “heavy-handed
F. Burton, the executive vice president of the industrial policy,” where the government picks
Council on Competitiveness, believes U.S. indus- technological winners and losers, is not the answer
trial policy often favors research and development (Cohen and Noll, 1991; National Academy of
over demonstration and adoption. More specifi- Sciences, 1992).
cally, Burton argues that U.S. industrial policy
treats technology transfer as an incidental divi- An argument can be made for public support of
dend of government research and development pre-commercial R&D when private industry, acting
(R&D)2, and not as the primary objective. In in response to market incentives, underinvests in
contrast, German and Japanese policies are de- socially desirable projects (e.g., Alston, 1992;
signed to promote the application and diffusion of Arrow, 1962; Cohen and Noll, 1991). Private sector
new technology (National Academy of Sciences, underinvestment can occur due to the following
1992). types of market failure:
Public support of pre-commercial R&D in Japan (1) Appropriability: A firm cannot appropriate all
R&D
and the European Community (EC) may be higher of the benefits from its investments
than in the United States. For example, through because others can “free-ride” on the public
efforts like the MITI and Key Technologies pro- goods produced as a result of its initial R&D;
grams, Japan has promoted partnerships among
business, universities, and government “down- (2) Externalities: An individual’s production or
stream” from basic research. Manufacturing exten- consumption activities affect another person’s
sion services, capital subsidies, accelerated production or consumption and those impacts
are not compensated through a market
transaction;
^Sources are listed in the references section at the end ofthis
article.
2R&D in this paper refers primarily to commercial projects. (3) Public sector benefits: The benefits of the R&D
There are generally four stages in commercial R&D (Cohen and are localized in the public sector; and
Noll, 1991).
RESEARCH; The first stage determines whether the basic (4) Risk aversion and financial market failures: A
ideas are technically sound. This exploratory research either firm may value near-term payoffs more highly
“expands the base of fundamental knowledge or applies the than society, thus leading to an underinvest-
existing base to some new set of problems;”
ment in activities that take a relatively long
DEVELOPMENT: The second stage consists of “designing, time to pay off, and/or a firm may be overly
building, and testing components and even small-scale risk averse as compared with the best interests
versions of new technology.” These types of activities are of society.
built on a firmer scientific base than research, and so the
uncertainty is usually less;
Appropriability
DEMONSTRATION: This category refers to “the construction
of an operating example of the new technology to prove its Appropriability becomes an issue when R&D
taercehnuiscuaalllayndthceommmoesrtcieaxlpefnesaisivbeiliatnyd.”tDheemyonasrteruantliioknelpyrotjoecbtes involves the promise of useful new knowledge that
attempted unless the uncertainties surrounding its perform- is generic, with wide applications across economic
ance are considerably less than those associated with the activities. Generally, private goods can be sold
previous two stages; and
commercially and the benefits from their sale are
ADOPTION; The fourth category is when a private and/or captured by those who own the associated property
public organization use the new technology. rights or patents. In agriculture, this includes
4
hybrid seeds, which must be purchased each time In the case of a negative externality, the price
a crop is planted. However, even the patent system system works too well (Kneese and Shultzie, 1975).
is often ineffective in protecting property rights Profit-motivated firms produce to that point where
over information (Hay and Morris, 1979). their marginal costs of production (private mar-
ginal costs) intersect demand. With a negative
Nonetheless, appropriability is most often an issue externality, private marginal costs do not incorpo-
with collective goods. By definition, collective goods rate all of the consumer costs associated with the
do not lend themselves to profitable merchandis- disposal and use of a particular product (that is,
ing, even though there may be significant gains to social marginal costs). As a result, private mar-
society. Agricultural examples of collective goods ginal costs are less than social marginal costs,
include improved self-pollinated plants such as any leading to overproduction from a societal perspec-
new variety of wheat that, once released and sown, tive. In turn, this overproduction generates a
can be retained and used as seed for planting in deadweight welfare loss for society.
subsequent years. Because private firms cannot
capture all the benefits of producing collective From an economic standpoint, the goal of regula-
R&D
goods, neither a socially optimal level of nor tion is to raise private marginal costs so they equal
a socially optimal amount of the goods will be social marginal costs. In a world of perfect
produced. information, regulators could use almost any policy
tool to ensure this outcome. Often, in reality, the
Government support of R&D in collective goods in best that can be done is to achieve a politically
agriculture is extensive. In wheat, this includes determined level of environmental quality at the
basic research in seed genetics, applied research in least cost (Anderson, 1977). This objective can be
the production of better varieties, demonstration reached with environmental taxes. Alternatively, if
projects to examine production in different cli- policy-makers are reluctant to increase taxes,
mates, and adoption information provided by the government support of R&D may prevent an
agricultural extension service. environmental externality from acting as a barrier
to entry for products that are more “environmen-
The problem of market failure is likely to be tally friendly.”
R&D
smaller for relatively applied/pre-commercial
R&D
than for basic (Evenson and Huffman, 1989); For illustrative purposes, consider biodegradable
however, pre-commercial R&D can exhibit appro- plastics. Between 1960 and 1990 annual growth in
priability problems (National Academy of Sciences, plastic production averaged 10 percent, far greater
1992). For example, “learning by doing” and other than the annual growth in the overall economy
forms of imitation may drive the price of a product (EPA, 1990). Unfortunately, increased plastic use
down, perhaps leaving an operating margin insuffi- has also resulted in increased plastic wastes. In a
cient to recover the costs of the original R&D 1990 report, EPA was primarily concerned with
(Cohen and Noll, 1991; Frisvold, 1991). Addi- the impact of plastic waste on solid waste manage-
tionally, much of the benefit of R&D is often ment and on the marine environment. Plastics
passed on to customers and does not enter into the currently account for approximately 8 percent by
profitability calculation of the firm (Mansfield, weight and 20 percent by volume of the municipal
1980; Scherer, 1982). For these reasons, neoclassi- solid waste stream (National Technical Informa-
cal economic theory does not weaken the case for tion Center, 1992).
Federal support of pre-commercial R&D, but it
does require evidence of appropriability problems In addition, plastic waste in the marine environ-
or some other form of market failure (Alston, ment often poses risks to marine life, human life,
1992). and aesthetic appearance. The Marpol Treaty,
signed in 1987 by 29 countries including the
Externalities United States, prohibits the discharge of all plastic
wastes at sea beginning in 1988 for commercial
Firms may also underinvest in pre-commercial vessels and in 1994 for government ships. In an
R&D due to an environmental externality. The effort to adhere to the treaty, the U.S. Army-
crucial feature of an externality is that there are in conjunction with the USDA and private
goods or services that people care about which are companies—has implemented a large-scale effort to
not sold in markets (Varian, 1987; Baumol and develop biodegradable polymers to replace
Oates, 1988). For instance, there is no market for petroleum-based plastics for all food uses.
pesticide leachate, nor is there a market for
environmentally sound farming practices. It is this Many of these polymers are being made from corn,
lack of a definable market that requires govern- wheat, and potato starch. The advantage of starch-
ment action. based polymers is that they are fully degradable,
5
but their cost is generally greater than the cost of little incentive to fund this type of demand-
petroleum-based plastics (U.S. Army/USDA, 1992). creating research (Frisvold, 1991). In comparison,
For that reason, there is little incentive for firms the Government has a significant incentive, since
to manufacture starch-based polymers. However, if demand-creating R&D would reduce the costs of
the social marginal cost of starch-based polymers farm income support programs.
were lower than the social marginal cost of
petroleum-based plastics, then the Government Similarly, innovations in the use and development
could improve resource allocation by subsidizing of new crops, which are economically viable
the production of starch-based polymers or taxing alternatives to program crops, could also reduce
the production of petroleum-based plastics. Alter- the costs of farm income support programs.
natively, the Government may prefer to support Consider the effect of a new crop on the commodity
R&D to reduce the private costs of starch-based program shown in fig. 2. As in fig. 1, the initial
polymer production. target price is set at F, output is q, and
government payments equal area FACP. The
Public Sector Benefits development of economically viable new crops
which compete for program acres, excluding those
Firms may underinvest in pre-commercial R&D acres in the conservation reserve program, would
because the benefits are localized in the public shift the supply curve for wheat or corn from S to
sector. A technological breakthrough in the produc- S’. In this case, the quantity produced of program
tion, for example, of starch-based polymers would crops decreases from q to q’, reducing government
increase market demand for corn or wheat and payments to FGHP’.
reduce program payments with a minimal, yet,
positive effect on total farm income (Leblanc and
Risk Aversion and Financial Market Failures
Reilly, 1988; Beach and Price, 1993).
Private firms may underinvest in pre-commercial
Consider the generic commodity program shown in R&D because the private discount rate may be too
fig. 1. Initially, the target price is set at F, output
high relative to the social discount rate, leading to
is q, and government payments equal area FACP. an underinvestment in activities that take a
Next, suppose there is a technological break- relatively long time to pay off. A related argument
tmehrrso.ughThiisn wtohueldprosdhiufcttitohne odfemstaanrdch-fborasepdrogporlaym- is that risk-averse firms may reduce R&D below
crops from D to D’. In this case, the demand shift the optimum social level (Arrow, 1962). This may
happen because firms cannot transfer all of their
has no effect on output, but it does reduce R&D
risks to shareholders, or because share-
government payments to FABP’. Because total
holders may not be persuaded to buy additional
returns to producers are unchanged, farmers have
shares, or because all the incentives to the firm
would be removed if all risks were shifted to
AFiguGreen1eric Farm Commodity Program IFingturreo2duction of a New Crop Given a
Generic Farm Program
Price
Price
6