IDEAS home Printed from https://ideas.repec.org/a/taf/defpea/v17y2006i4p287-309.html
   My bibliography  Save this article

Uncertainty, Risk Aversion, And Optimal Defense Against Interruptions In Supply

Author

Listed:
  • Martin McGuire

Abstract

Recent international conflicts have resurrected concerns about how to manage supply disruptions or sudden escalation of need for energy, and other critical imports such as vaccines or military components. Prominent proactive measures include support of domestic production and accumulation of reserves or maintenance of stand-by production. This paper develops a clear transparent method for comparing instruments and for identifying the optimum policy mix. We show how a country's risk aversion influences the best mix of policies and interacts unexpectedly with the degree of risk itself. Specifically, high-risk aversion and low risk are shown to favor domestic production support as the better defense, and to disfavor stockpiling (and vice versa). In clarifying a country's best policy response to risks of supply interruption, this analysis predicts how income level and risk aversion characteristics should shape arguments for and against interference with free trade on grounds of 'national security.'

Suggested Citation

  • Martin McGuire, 2006. "Uncertainty, Risk Aversion, And Optimal Defense Against Interruptions In Supply," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 287-309.
    • Handle: RePEc:taf:defpea:v:17:y:2006:i:4:p:287-309
    DOI: 10.1080/10242690600612688
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/10242690600612688
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/10242690600612688?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin C. McGuire, 2000. "Provision for Adversity," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 730-752, December.
    2. Bhagwati, Jagdish N. & Srinivasan, T. N., 1976. "Optimal trade policy and compensation under endogenous uncertainty: The phenomenon of market disruption," Journal of International Economics, Elsevier, vol. 6(4), pages 317-336, November.
    3. Albert L. Nichols & Richard J. Zeckhauser, 1977. "Stockpiling Strategies and Cartel Prices," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 66-96, Spring.
    4. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399.
    5. Todd Sandler, 2000. "Economic Analysis of Conflict," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 723-729, December.
    6. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    7. Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 1998. "Lectures on International Trade, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522470, December.
    8. McGuire, M., 2000. "Provision for Adversity: Managing Supply Uncertainties in an Era of Globalization," Papers 99-00-16, California Irvine - School of Social Sciences.
    9. McGuire, Martin C & Pratt, John & Zeckhauser, Richard, 1991. "Paying to Improve Your Chances: Gambling or Insurance?," Journal of Risk and Uncertainty, Springer, vol. 4(4), pages 329-338, December.
    10. Toshihiro Ihori, 1999. "Protection against national emergency: International public goods and insurance," Defence and Peace Economics, Taylor & Francis Journals, vol. 10(2), pages 117-137.
    11. Todd Sandler & Håvard Hegre, 2002. "Economic analysis of civil wars," Defence and Peace Economics, Taylor & Francis Journals, vol. 13(6), pages 429-433.
    12. Sandler,Todd & Hartley,Keith, 1995. "The Economics of Defense," Cambridge Books, Cambridge University Press, number 9780521447287.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin C. McGuire, 2010. "Economic Analysis and International Security," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(2), pages 313-346, March.
    2. Toshihiro Ihori & Martin McGuireb, 2008. "National Adversity: Managing Insurance and Protection," CIRJE F-Series CIRJE-F-554, CIRJE, Faculty of Economics, University of Tokyo.
    3. Toshihiro Ihori & Martin McGuire, 2006. "Patterns of Non-exponential Growth of Macroeconomic Models: Two-parameter Poisson-Dirichlet Models," CIRJE F-Series CIRJE-F-450, CIRJE, Faculty of Economics, University of Tokyo.
    4. Toshihiro Ihori & Martin McGuire, 2006. "Group Provision Against Adversity: Security By Insurance vs. Protection," CARF F-Series CARF-F-086, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin C. McGuire, 2010. "Economic Analysis and International Security," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(2), pages 313-346, March.
    2. Toshihiro Ihori & Martin McGuire, 2006. "Group Provision Against Adversity: Security By Insurance vs. Protection," CARF F-Series CARF-F-086, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Martin C. McGuire, 2000. "Provision for Adversity," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 730-752, December.
    4. Huntington, Hillard G., 2003. "Energy disruptions, interfirm price effects and the aggregate economy," Energy Economics, Elsevier, vol. 25(2), pages 119-136, March.
    5. Todd Sandler, 2000. "Economic Analysis of Conflict," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 723-729, December.
    6. Toshihiro Ihori & Martin McGuire, 2006. "Patterns of Non-exponential Growth of Macroeconomic Models: Two-parameter Poisson-Dirichlet Models," CIRJE F-Series CIRJE-F-450, CIRJE, Faculty of Economics, University of Tokyo.
    7. Toshihiro Ihori & Martin McGuireb, 2008. "National Adversity: Managing Insurance and Protection," CIRJE F-Series CIRJE-F-554, CIRJE, Faculty of Economics, University of Tokyo.
    8. Louis Eeckhoudt & Philippe Godfroid, 1998. "The market value of preventive activities: A contingent-claims approach," Journal of Economics, Springer, vol. 68(1), pages 27-38, February.
    9. Toshihiro Ihori & Martin McGuire, 2010. "National self-insurance and self-protection against adversity: bureaucratic management of security and moral hazard," Economics of Governance, Springer, vol. 11(2), pages 103-122, April.
    10. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, vol. 121(2), pages 290-293.
    11. Kaïs Dachraoui & Georges Dionne & Louis Eeckhoudt & Philippe Godfroid, 2004. "Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 261-276, December.
    12. TOSHIHIRO IHORI & MARTIN C. McGUIRE, 2007. "Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 231-263, April.
    13. Tim Lohse & Julio R. Robledo & Ulrich Schmidt, 2012. "Self‐Insurance and Self‐Protection as Public Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 57-76, March.
    14. Serhan Cevik & Mohammad Rahmati, 2015. "Breaking the Curse of Sisyphus: An Empirical Analysis of Post-Conflict Economic Transitions," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 57(4), pages 569-597, December.
    15. F. McElroy, 2007. "“Probability of risk aversion” and other applications of derivatives of the certainty equivalent," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 54(4), pages 429-444, December.
    16. Benoît Sévi & Fabrice Yafil, 2005. "A special case of self-protection: The choice of a lawyer," Economics Bulletin, AccessEcon, vol. 4(6), pages 1-8.
    17. Creti, Anna & Villeneuve, Bertrand, 2008. "Equilibrium Storage in a Markov Economy," MPRA Paper 11944, University Library of Munich, Germany.
    18. Chiu, W.Henry, 2005. "Degree of downside risk aversion and self-protection," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 93-101, February.
    19. Michael Mandler and Michael Spagat, 2003. "Foreign Aid Designed to Diminish Terrorist Atrocities can Increase Them," Royal Holloway, University of London: Discussion Papers in Economics 03/10, Department of Economics, Royal Holloway University of London, revised Dec 2003.
    20. Anderton,Charles H. & Carter,John R., 2009. "Principles of Conflict Economics," Cambridge Books, Cambridge University Press, number 9780521875578, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:defpea:v:17:y:2006:i:4:p:287-309. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/GDPE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.