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Contracting, Signaling of Uncertain Quality, and Price Volatility?

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  • Chin, Ming-Chin
  • Weaver, Robert D.

Abstract

Theoretical and simulation results clarify the role of forward procurement contracting as a determinant of spot price levels and volatility. A stylized model determines market share across quality when procurers forward contract to manage quality risk. Actual supply is specified as price dependent and stochastic. Simulation examines sensitivity of spot price level and volatility to extent of forward contracting, risk aversion, and ability to adjust spot market demand (recontracting). The results show that as forward contracting increases mean spot price decreases and variance increases. This effect increases as risk aversion decreases and as the extent of recontracting adjustment in spot demand decreases.

Suggested Citation

  • Chin, Ming-Chin & Weaver, Robert D., 2002. "Contracting, Signaling of Uncertain Quality, and Price Volatility?," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24790, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae02:24790
    DOI: 10.22004/ag.econ.24790
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    References listed on IDEAS

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    1. Stephen R. Koontz, 1999. "Marketing Agreement Impacts in an Experimental Market for Fed Cattle," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 347-358.
    2. Ted C. Schroeder & Rodney Jones & James Mintert & Andrew P. Barkley, 1993. "The Impact of Forward Contracting on Fed Cattle Transaction Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(2), pages 325-337.
    3. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    4. Elam, Emmett W., 1992. "Cash Forward Contracting Versus Hedging Of Fed Cattle, And The Impact Of Cash Contracting On Cash Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(1), pages 1-13, July.
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    Keywords

    Risk and Uncertainty;

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