An Experimental Investigation of the Incentives to Form Agricultural Marketing Pools
UCSD Economics Discussion Paper 97-35
Posted: 20 Mar 1998
Date Written: December 1997
This paper presents theoretical extensions and laboratory tests of the Hoffman and Libecap (1994) model of individual firm incentives to form agricultural marketing pools. The key incentives are lower variance in output prices and economies in scale in marketing. This paper extends the model by allowing firms to have heterogeneous risk attitudes over uncertain profits via the tools of Bayes-Nash equilibrium. An experimental design is conducted to test the theoretical implications of this model. Statistical analysis of the experimental data using random effects probit models supports the model that incorporates heterogeneous risk attitudes that are private information. Furthermore, the statistical analysis reveals a stylized fact: strategic uncertainty leads to more noise around the Bayes-Nash equilibrium of environments that posses economies of scale for pool participants. This is evidence that economy of scale arguments for pooling may not be as empirically strong as previously believed.
JEL Classification: C92, C23, D82, Q13
Suggested Citation: Suggested Citation