Economic Value of Weather Forecasting Systems Information: A Risk Aversion Approach
AbstractExtreme meteorological events have increased over the last decades and it is widely accepted that it is due to climate change (IPCC, 2007; Beniston et al., 2007). Some of these extremes, like drought or frost episodes largely affect agricultural outputs and risk management becomes crucial. The goal of this paper it is to analyze farmers’ decisions about risk management, taking into account climatological and meteorological information. We consider a situation in which the farmer, as part of crop management, has available a technology to protect the harvest from weather effects. This approach has been used by Murphy et al. (1985), Katz and Murphy (1990 and 1997) and others in the case that the farmer maximizes the expected returns. In our model we introduce the attitude towards risk. Thus we can evaluate how the optimal decision is affected by the absolute risk aversion coefficient of Arrow-Pratt, and compute the economic value of the information in this context, while proposing a measure to estimate the amount of money that the farmer is willing to pay for this information in terms of the certainty equivalent.
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Bibliographic InfoPaper provided by FEDEA in its series Working Papers with number 2009-04.
Date of creation: Jan 2009
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This paper has been announced in the following NEP Reports:
- NEP-AGR-2009-02-22 (Agricultural Economics)
- NEP-ALL-2009-02-22 (All new papers)
- NEP-ENV-2009-02-22 (Environmental Economics)
- NEP-UPT-2009-02-22 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gomez-Limon, Jose A. & Arriaza, Manuel & Riesgo, Laura, 2003. "An MCDM analysis of agricultural risk aversion," European Journal of Operational Research, Elsevier, Elsevier, vol. 151(3), pages 569-585, December.
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"Rejecting small gambles under expected utility,"
Economics Letters, Elsevier,
Elsevier, vol. 91(2), pages 250-259, May.
- Ignacio Palacios-Huerta & Roberto Serrano & Oscar Volij, 2003. "Rejecting Small Gambles Under Expected Utility," Economics Working Papers, Institute for Advanced Study, School of Social Science 0032, Institute for Advanced Study, School of Social Science.
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