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

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  • 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.'

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  • 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
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    References listed on IDEAS

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    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.
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    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.
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    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.

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