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UC Berkeley Faculty Research Profile

http://vcresearch.berkeley.edu/gordon-rausser

Recent Research Highlights

Political Economy of Public Policies: Insights from Distortions to Agricultural and Food Markets

with K. Anderson and J. Swinnen
Journal of Economic Literature 51 (2): 423–77 (2013)
The agricultural and food sector is an ideal case for investigating the political economy of public policies. Many of the policy developments in this sector since the 1950s have been sudden and transformational, while others have been gradual but persistent. This article reviews and synthesizes the literature on trends and fluctuations in market distortions and the political-economy explanations that have been advanced. Based on a rich global data set covering a half-century of evidence on commodities, countries, and policy instruments, we identify hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible.

Political Power and Economic Policies

with J. Swinnen and P. Zusman
Cambridge University Press (2011)
Table of Contents
Chapter 1
This book theoretically explains and empirically quantifies the interactions between political economics, governance structures, and the distribution of political power in economic policy making. The analysis includes both public-good policies and redistributive policies. Four analytical dimensions of public policy are distinguished: governance structures, political economy, mechanism design, and incidence.

  • Part 1: Conceptual foundations of political-economic bargaining and interest-group analysis
  • Part 2: Ideology, prescription, and political-power measures
  • Part 3: Analysis of specific structures, including commodity markets, research and development, redistributive policies and public-good investment, coalition-breaking, policy reform and compensation, property rights, water resources, quality regulations, transition economies, and bureaucracies
  • Part 4: Framework for political econometrics and several empirical applications and testable hypotheses

US Policy Contributions to Agricultural Commodity Price Fluctuations, 2006–2012

with H. de Gorter
In Political Economy of Food Price Policy, ed. P. Pinstrup-Andersen. New York: Oxford University Press (2013)
Since 2006, global prices and price volatility for food-grain commodities have spiked frequently and dramatically. Such spikes have had the heaviest economic and social impact on developing nations, where agriculture accounts for a sizable portion of economic activity. We demonstrate how US public policies have contributed to these spikes. We first assess the impacts of US agricultural and macroeconomic policies on basic food-commodity markets in the United States and their spillover effects on world markets prior to 2006. We then focus on the emergence of US biofuel policies since 2006, highlighting how these policies have interacted with biofuel policies in the rest of the world to integrate fuel and food-grain prices. We also analyze the political economy of US biofuel policies, the changing US political landscape, and current Farm (or Food) Bill politics and their linkages to biofuels. We demonstrate that the “iron triangle” that once influenced governmental intervention in program-commodity markets has expanded into an “iron maze” of environmental, energy, and agricultural organized interest-groups that continues to evolve.

Commodity Booms and Busts

with C. A. Carter and A. Smith
Annual Review of Resource Economics 3:87–118 (2011)
This analysis extends beyond agricultural commodities to precious metals, base metals, crude oil, gasoline, and all other commodities that are actively traded on futures markets. The authors find that many of the arguments advanced in the literature to explain commodity booms and busts focus on a single fundamental force (such as market structure) and neglect other potential causal explanations. Although no simple explanation for each boom or bust is found, several fundamental forces that drive these complex events are identified. In particular, supply and/or demand problems and abnormal inventories have been magnified by macroeconomic shocks, cross-commodity linkages, and governmental policy responses that failed to dampen volatility and instead exacerbated it.

Political Economy of Public-Sector Policies

Dr. Rausser’s research in this field uses a political-economic lens to analyze instances in which government policy and political forces interact to allocate resources inefficiently and thus sacrifice the general public good. He addresses this question in relation to resources such as food crops, water, forms of energy, and research and development. He also proposes changes to governance structures and policy that can help remedy these problems. Dr. Rausser also conducts research on the political-economic theories that underlie current research, such as models of decision making.

Nash Bargaining and Risk Aversion

Co-author: L. K. Simon
In preparation
This theoretical work on political bargaining and negotiations unearths a fundamental error in game-theory literature concerning the Nash bargaining model. Most economists agree that the more an interest group or negotiator is averse to risk, the less effective it is as a bargainer. This paper shows, however, that this result is based on excessively restrictive and unrealistic conditions. If these conditions are relaxed, the claimed relationship between bargaining effectiveness and risk-aversion evaporates.

Governance Structures, Political Economy, and Public Policy

with J. Swinnen
American Journal of Agricultural Economics 93(2): 310–16 (2010)
This article argues that Harvard economist Daniel Rodrik’s claim that the political-economic lens provides “no role that economists can play in policy making and policy advice” is far too pessimistic. Dr. Rausser and his co-author demonstrate that formulating sustainable policy reforms requires a governance structure that will establish a new political-economic equilibrium.

Special Interests vs. the Public Interest in Policy Determination

with G. Roland
In Political Economy of Agricultural Price Distortions, ed. K. Anderson, 105–125, Cambridge University Press (2010)
This article distinguishes special interests from the public interest in policy determination. It evaluates the effects on specific policies in food and agriculture of electoral rules, presidential versus parliamentary systems, and other institutional structures.

Collective Choice in Natural Resources

Dr. Rausser’s research on this topic focuses on three major natural resources: forests, water, and fisheries. A recent research grant from the University of California Institute for Mexico and the United States (UC MEXUS) has supported an investigation into how community forests in Mexico can best be managed.

Forestry

Ownership and Control in Mexico’s Community Forestry Sector

with C. Antinori
Economic Development and Cultural Change 57(1): 101–136 (2008)
This article focuses on collective choice and community forestry management in Mexico. It isolates ownership and control premiums in community decision-making processes, presents survey data, and describes how modern financial contracting can help improve governance structure and decision-making in these community forests.
Since the paper was published, Dr. Rausser and his colleagues have continued with this work by organizing several conferences on this topic in Mexico and by producing a number of working papers.

Water

Local Negotiation with Heterogeneous Groundwater Users

with S. S. Sayre and L. K. Simon
Strategic Behavior and the Environment 1(2): 61–82 (2011)
This paper examines the case of heterogeneous groundwater users. We compare various local negotiation structures to the optimal social-planning management of groundwater. Empirical results demonstrate that local collective action performs poorly when the intra-aquifer disparity of potential stakeholder gains is large. The fact that large potential gains that are not captured by local political institutions exist suggests that the state should intervene in the management of groundwater resources in California.

Property Rights and Water Transfers: Bargaining amongMultiple Stakeholders

with S. S. Sayre and L. K. Simon
Strategic Behavior and the Environment (1): 1–29 (2010)
The authors examine negotiations over water transfer from California’s Imperial Valley to urban areas in San Diego County. Modeling the negotiations as a multi-issue, multi-party, non-cooperative negotiation game, they demonstrate that the model can be calibrated to the actual contractual agreement reached between agricultural users and urban users. The authors also highlight ill-defined property rights in common-pool resource systems and argue that exchange must be determined by negotiation rather than markets.

Fisheries

Unintended Consequences: The Spillover Effects of Common Property Regulations

with M. Kovach, R. Stifter, and S. Hamilton
Marine Policy 33(1): 24–39 (2009)
The Hawaiian long-line swordfish fishery was closed during 2001–2004 in order to protect endangered sea turtles. It also created a natural experiment that made it possible to identify the market transfer of catch (and sea turtle by-catch) from Hawaii to other regions. Dr. Rausser and his co-authors exploit the fact that the vessels in the Hawaiian long-line fishery sell their catch in the US swordfish market as they analyze the pattern of changes in consumption of swordfish in the US both before and after the closure was imposed. Unintended adverse consequences for endangered sea turtles in other fishery locations in the world are shown to have taken effect through the US swordfish market. Moreover, the locations that experienced increased exports to the US are characterized by a smaller ratio of swordfish catch to sea turtle by-catch than has been the case in Hawaii. The authors conclude that the market transfer of catch from the Hawaiian long-line fishery to other regions is likely to have had adverse consequences on sea turtles.

Public-Private Partnerships

Dr. Rausser’s leadership of the College of Natural Resources as Dean (1994–2000)

and subsequent counsel to UC Berkeley faculty colleagues in the biological sciences on establishing the Energy Biosciences Institute led him to develop an active research program in public-private partnerships. Initially, this research focused on the distinction between basic and applied research and the feedback loops that might arise between private- and public-good research and development. Dr. Rausser challenged the claim that private-sector funding of public research would inevitably diminish the amount of basic public-good research that would be conducted.
Dr. Rausser’s subsequent research in this area explores public-private partnerships beyond research and development collaborations. He and his colleagues apply modern financial contracting theory and practice to the design and implementation of public-private partnerships. They formally recognize that most public-private partnerships generate products and services that are neither purely public nor purely private; rather, they are “impure.” Based on the incomplete contracting and control-premium literature, they specify a three-stage framework for evaluating the potential successes and risks of a variety of public-private partnerships in natural resources. The natural resources evaluated include market and nonmarket goods and services that arise from water, land use, mining, environmental remediation, forestry, fisheries, and research and development.
Dr. Rausser’s work on this theme will culminate in a forthcoming book on structuring public-private partnerships.

Incomplete Contracting and Public-Private Partnerships

with H. Ameden
In The Routledge Companion to Public-Private Partnerships, eds. Piet de Vries and Étienne Yehoue, Routledge (2012)
This research elaborates on a three-stage operational framework for evaluating public-private contracts. The control rights in these contractual commitments arise in response to potential contingencies in the partnership’s production process. In Stage 1, the public and private partners negotiate to determine the allocation of front-end control rights and back-end property rights. In Stage 2, the partners bargain over management decisions; bargaining power is determined by the contract and investments made in Stage 1. The outcome is either a non-cooperative decision or a cooperative solution that maximizes the joint benefit. In Stage 3, an unanticipated shock causes the stakeholders to revisit their control and property rights. Depending on the nature of the shock, the partners may engage in renegotiation that reassigns control and property rights (and so return to Stage 1), or they may terminate the partnership.

Structuring University-Private Partnerships for Developing and Commercializing Transgenic Horticultural Crops

with R. Stevens
In Transgenic Horticultural Crops: Challenges and Opportunities, eds. B. Mou and R. Scorza, 233–48, CRC Press (2011)
This chapter focuses on structuring university-private partnerships for developing and commercializing transgenic horticultural crops. The authors note that the gap between public-sector horticultural research and private research institutions’ efforts can be effectively bridged by forming public-private partnerships. Essentially, such partnerships allow academic researchers to gain access to commercialization technologies (e.g., gene expression profiles and genome maps) and private firms to gain early access to new basic research and innovations.

Public-Private Partnerships: Goods and the Structure of Contracts

with R. Stevens
Annual Review of Resource Economics 1(1): 75–97 (2009)
Many case studies are evaluated here in order to provide unique insights into the contractual structures needed in order to manage and provide impure public goods. Dr. Rausser and his co-author demonstrate that the preferred contract structure depends on the type of goods or services generated. This pivotal point generally results in shared authority in the extraction or production and consumptive distribution of natural resources. They evaluate how control rights should be structured and assigned among the parties to the partnership.

Public- Versus Private-Good Research at Land-Grant Universities

with L. K. Simon and R. Stevens
Journal of Agricultural and Food Industrial Organization 6(2): Article 4 (2008)
This paper analyzes the effect of private sponsorship of university research on the allocation of research expenditures between public-good research and commercial applications. The authors focus on the land-grant university system. Because that system faces increasing pressure as a result of reduced governmental funding, concern has arisen that private funding will cause fundamental research to be neglected in favor of research geared toward commercial applications. This paper uses both a static and a dynamic model to investigate and isolate the conditions under which university-private partnerships can crowd in or crowd out basic-science research, as public funding becomes scarcer.

Environmental and Resource Economics

Dr. Rausser’s research in this area investigates existing obstacles to efficient distribution of resources and proposes solutions that minimize environmental damage. Some of the issues addressed are location-specific; others are more theoretical and apply generally.

Agrienvironmental Programmes and Trade Negotiations in the United States and the European Union

with K. Baylis, S. Peplow, L. K. Simon
Eurochoices 10(2): 55–60 (2011)

Agri-Environmental Policies in the European Union and United States

with K. Baylis, S. Peplow, and L. K. Simon
Ecological Economics 65(4): 753–64 (2008)
In these two papers, Dr. Rausser and his co-authors focus on agri-environmental programs and their implications for trade negotiations (especially the WTO Doha Round). They specifically compare the agri-environmental programs in the European Union to those in the United States. They demonstrate that despite their similarities, the two regions have designed their programs in strikingly different ways. More importantly, in the context of the WTO and ongoing trade negotiations, the respective designs of their agri-environmental programs provide little opportunity to align interests between the US and EU and thus create significant obstacles to a cooperative solution in WTO negotiations.

Optimal Taxation with Joint Production of Agriculture and Rural Amenities

with G. Casamatta and L. K. Simon
Resource and Energy Economics 33(3): 544–53 (2010)
This paper advances a theoretical model that investigates optimal taxation when complementarities exist between agricultural production and rural amenities. It shows that when there is joint production of an agricultural good and of rural amenities, the first-best allocation of resources can be implemented via a tax on the agricultural good and subsidies on various productive factors, including land and labor. The subsidy policy instruments often used on the agricultural good itself can only stem from a government’s desire to redistribute income from consumers to producers.

Pollution and Land Use: Optimum and Decentralization

with R. Arnott and O. Hochman
Journal of Urban Economics 64(2): 390–407 (2008)
Previous models of pollution either disregard space altogether or presume a predetermined separation between polluters and pollutees. But space matters not only because it entails transport costs but also because it can mitigate pollution damage. In the proposed model, workers commute to factories, and all possible combinations of housing and industry locations within a circle are considered. Dr. Rausser and his co-authors investigate optimal space allocations and decentralization. The trade-off between pollution costs and transport costs, along with the non-convexity inherent in spatial models, results in multiple local optima. With negligible commuting costs, the optimal allocation has one industrial and one residential zone. As commuting costs increase, the number of zones of each type increases until an allocation is reached in which housing and industry are completely intermixed. The global optimal allocation is decentralized by imposing a tax per unit area of industrial land at a particular location equal to the total damage caused by the pollution from that unit area, evaluated at the global optimum. By themselves, location-specific Pigouvian taxes are inefficient.

Commodity Markets

Dr. Rausser has written extensively about how commodity markets work and the effects they can have on public welfare. He has recently been investigating why commodity prices are becoming more volatile and how that volatility can be minimized. Other recent areas of interest include optimal design of crop contracts and analyzing consumer food preferences in order to improve food production and marketing.

Commodity Storage and the Market Effects of Biofuel Policies

with C. A. Carter and A. Smith
Submitted for publication (2013)
How much of the recent jump in food prices can be attributed to the increased use of food crops to produce biofuel? US legislation passed in 2007 in effect requires that a large quantity of corn be converted into ethanol for fuel use. Corn-based ethanol production in the United States has quadrupled since 2005 and now absorbs 15 percent of all corn produced in the world. This article estimates what the price of corn would have been if no growth in corn-based ethanol production had been mandated under the US Renewable Fuel Standard. Using time-series econometric methodologies, the authors estimate that corn prices were about 30 percent greater between 2006 and 2011 than they would have been without the mandate. They also estimate the extent to which ethanol production has exacerbated the effects of the 2012 drought, finding that global corn prices in 2012 would have been about 40 percent lower had it not been for the mandate. The impact of US energy policy on global corn prices is thus considerable, particularly for the world’s poor.

Commodity Booms and Busts

with C. A. Carter, A. Smith
Annual Review of Resource Economics 3:87–118 (2011)
This analysis extends beyond agricultural commodities to precious metals, base metals, crude oil, gasoline, and all other commodities that are actively traded on futures markets. The authors find that many of the arguments advanced in the literature to explain commodity booms and busts focus on a single fundamental force (such as market structure) and neglect other potential causal explanations. Although no simple explanation for each boom or bust is found, several fundamental forces that drive these complex events are identified. In particular, supply and/or demand problems and abnormal inventories have been magnified by macroeconomic shocks, cross-commodity linkages, and governmental policy responses that failed to dampen volatility and instead exacerbated it. The authors’ prescription for minimizing future price spikes and volatility lies with managing stockholding effectively and investing in productive new technologies.

Interactions between Incentive Instruments: Contracts and Quality in Processing Tomatoes

with R. E. Goodhue, S. Mohaptra
American Journal of Agricultural Economics 92(5): 1283–93 (2010)
The authors investigate the tomato-processing supply chain in California. The form of vertical coordination within the supply chain that is examined is contracting. Hypotheses are tested about whether or not price incentives for two critically important quality attributes exhibit complementarity in promoting the actual product dimensions delivered under the contractual commitments. The results demonstrate that price incentives for the two attributes are substitutes for the provision of one of the quality dimensions and complements for the other. Based on these results, several prescriptions are offered for the design of future incentive contracts.

The Marginal Willingness to Pay for Health-Related Food Characteristics

with L. Thunström
Food Economics 5(3): 194–206 (2008)
The authors investigate consumers’ willingness to pay for health-related characteristics of various food commodities. They isolate the trade-off consumers often face between taste and nutrition. The specific commodities investigated include breakfast cereals, bread, and potato products. The value attached to fat, fiber, salt, and sugar are computed, as well as the value provided by readily available information in the marketplace. The empirical results show that consumers have context-dependent preferences for food characteristics: consumers who prefer nutrition over taste for some ingredients in a specific product may prefer taste over nutrition for other products. Consumers’ marginal willingness to pay for various characteristics thus proves sensitive to changes in the mix of such characteristics within a particular product.

Conference Presentation

US Policy Contributions to Agricultural Commodity Price Fluctuations, 2006-2012

(with H. de Gorter)
Political Economy of Food Price Policy Workshop, Cornell University, Ithaca, NY, July 2012

Plant Biotechnologies

In his research in the field of plant biotechnologies, Dr. Rausser examines how public policy determines market developments such as mergers and technology transfer. He also proposes that public-private partnerships between private companies and research institutions can facilitate the development and implementation of new technologies. Such partnerships allow academic researchers to gain access to commercialization technologies (e.g., gene-expression profiles and genome maps) and allow private firms to gain early access to new basic research and innovations.

US versus EU Biotechnology Regulations and Comparative Advantage: Implications for Future Conflicts and Trade

with G. Hochman and D. Zilberman
In Transatlantic Regulatory Cooperation: The Shifting Roles of the EU, the US, and California, eds. D. Vogel and J. Swinnen, 161–79, Edward Elgar (2011)
Dr. Rausser and his colleagues compare genetically modified–organism (GMO) regulations in the US and the EU. They identify two key facets of development in this rapidly changing science-based industry: innovation and regulation. They find that while an efficient mechanism for facilitating technology transfer and adopting new discoveries does not exist in the EU, such a mechanism has, to some degree, been facilitated in the US. In contrast to the existing literature, this article formally identifies the implications of the cost of over-regulation that has emerged in the EU and, to a lesser degree, in the US.

Structuring University-Private Partnerships for Developing and Commercializing Transgenic Horticultural Crops

Co-author: R. Stevens
In Transgenic Horticultural Crops: Challenges and Opportunities, eds. B. Mou and R. Scorza, 233–48, CRC Press (2011)
This chapter focuses on structuring university-private partnerships that can facilitate development and commercialization of transgenic horticultural crops. It shows that public-private partnerships can bridge the gap between public-sector horticultural research and private institutions’ efforts to commercialize new technologies. Such partnerships allow academic researchers to gain access to commercialization technologies (e.g., gene-expression profiles and genome maps) and private firms to gain early access to new basic research and innovations.

Complementarities and Spillovers in Mergers: An Empirical Investigation Using Patent Data

with A. Marco
Economics of Innovation and New Technology 20(3): 207–31 (2011)

The Role of Patent Rights in Mergers: Consolidation in Plant Biotechnology

with A. Marco
American Journal of Agricultural Economics 90(1): 133–51 (2008)
These two articles investigate complementarities and spillovers in the dramatic mergers and consolidation that have taken place since the 1980s within the world seed industry. The framework is designed to determine the importance of patent and intellectual property rights for these mergers and consolidations. Dr. Rausser and his co-author use conditional logit estimation to determine the probabilities that firms will “match” in mergers and spin-offs. They compute several patent portfolio–based measures of complementarity and spillovers between firms to see whether these measures predict matches that will take place. The empirical results demonstrate that complementarities provide a more significant causal explanation than do spillovers. The authors find that many of these mergers and spin-offs are motivated by the firms’ desire to overcome the anti-commons problem of mutually blocking technology. The general implication of the results is that the Department of Justice and the Federal Trade Commission should integrate intellectual property and patent policy with competition policy.

Renewable Energy

Dr. Rausser has recently turned his attention toward renewable-energy issues and has received a portion of a grant of almost $1 million from the Energy Biosciences Institute at UC Berkeley. He has focused on countries that are attempting to jump-start renewable-energy industries: China, the European Union, India, and the United States. Dr. Rausser and his research colleagues find that the public sector in each of these countries has adopted a smorgasbord of policy instruments to achieve its stated objectives. They also evaluate the private sector’s response to these policy instruments, including increased commercial investment in renewable-energy R&D.
Dr. Rausser and his colleagues have given several presentations on rational industrialization policy and the potential complementarities between research and development investments, downstream market incentives, and carbon-emission tax incentives.

Managing R&D Risk in Renewable Energy

with M. Papineau
In Transition to a Bioeconomy: Risk, Infrastructure, and Industry Evolution, ed. Burt English, 29–41, Farm Foundation (2009)
This book chapter focuses on the private sector’s response to market opportunities generated by spikes in crude-oil prices and by governmental support, including debt financing and market-based incentives. Dr. Rausser and his co-author find that as private-sector firms increase their exposure to renewable-energy markets, the public sector will increasingly be pulled in the direction of ensuring against the downside risk of clean-energy investments. They show that from the standpoint of social welfare, the optimal allocation of such support by the public sector is fundamentally a problem of ex ante portfolio analysis under risk and uncertainty.

Managing R&D Risk in Renewable Energy: Biofuels vs. Alternate Technologies

with R. Stevens and K. Torani
AgBioForum 13 (4): 375–81 (2010)
This paper focuses on managing R&D risk in renewable energy, distinguishing biofuels from such alternative technologies as solar, wind, fuel cells, batteries, and hydrogen.

Conference Presentations

The Economics of Alternative Biofuel

with H. Zhi
Sixth Berkeley Bioeconomy Conference: The Bioeconomy after the Election, UC Berkeley, March 2013

Policy Pathways to a Viable Renewable-Energy Sector

with H. Zhi
IAEE 28th International Conference Session on “The Future of Agricultural Economics in a Bio-Economy World,” Foz do Iguacu, Brazil, August 2012
AERE session on “Environment, Innovation, and Technical Change,” WEAI Annual Meeting, San Francisco, June 2012
16th International Consortium on Applied Bioeconomy Research (ICABR) Conference on Sustainability and the Bioeconomy, Ravello, Italy, June 2011

The Public-Sector Role in Jump-Starting a Viable Renewable-Energy Sector

with H. Zhi
Association of Environmental and Resource Economists Summer Conference, Seattle, June 2011
These presentations survey the renewable-energy landscapes of the major users of energy and developers of renewable-energy technologies: Brazil, China, the European Union, India, and the United States. For now, governmental support for renewable energy is essential for commercial viability. Policymakers are pursuing several goals, including energy security, reduced greenhouse-gas emissions, improved health, and job creation. Dr. Rausser and his co-author group the policy instruments that are being used to meet these goals into five categories: public-sector R&D expenditures, market-based incentives, externality-based incentives, financial instruments, and tax-based policy instruments.
A theoretical model is developed that isolates the effectiveness of public-sector research and development-policy instruments relative to downstream market-based incentives and subsidies for private-sector R&D. Private sectors have responded positively to governmental support and investment in both research and development and commercial enterprises. However, as the private sector’s exposure to renewable-energy markets increases, special interests will increasingly pull the public sector in the direction of insuring against downside risk. Without an objective ex ante guide for public-sector support, governments are likely to promote various segments of the renewable-energy industry based on the effectiveness of various parties’ political-economic efforts. These papers also demonstrate that public sectors are handicapped by failing to set negative prices on carbon emissions.

Is Biofuel a Good Investment?

Third Berkeley Conference on the Bioeconomy, UC Berkeley, April 2011

Managing R&D Risk in Renewable Energy: Biofuels versus Alternate Technologies

with K. Torani
14th International Consortium on Applied Bioeconomy Research (ICABR) Conference on Bioeconomy Governance, Ravello, Italy, June 2010

Aggregation Games

Dr. Rausser has collaborated on several working papers focused on aggregation games, which are found in many industries and pervade the political-economic structure of both presidential and parliamentary democratic systems. He is currently working with his colleagues on completing these papers for publication.

Rational Exaggeration in Information Aggregation Games

with L. K. Simon and J. Zhao

Polarization in Information Aggregation Games

(with L. K. Simon and J. Zhao)
In preparation

In “Rational Exaggeration in Information Aggregation Games,” Dr. Rausser and his colleagues focus on rational exaggeration and prove a large number of theorems and propositions for various equilibrium outcomes. “Polarization in Information Aggregation Games” uses the rational-exaggeration framework to explore the distinction between position and platform polarization. In order to limit the reports that can be submitted by individual participants in the aggregation process, several industries exclude “outliers.” The authors use modern-order statistics to evaluate the equilibrium outcomes while recognizing the underlying biases of the reporters and their strategic incentives for exaggeration.

Over-the-Counter Derivatives

Dr. Rausser’s research on OTC financial contracts explores methods for protecting OTC investments by regulating how the contracts they are based on operate. One outcome of this research is a recent patent award (see below). Another is a grant from the Coleman Fung Risk Management Center at the Institute of Business and Economic Research at the University of California, Berkeley (see below). The patent and research that have been completed will serve as the basis for additional research scheduled to be completed once the US Commodity Futures Trading Commission and the Securities and Exchange Commission implement their respective regulatory rules based on the guidelines established by the Dodd-Frank legislation.

Integrated Electronic Exchange of Structured Contracts with Dynamic Risk-Based Transaction Permissioning

U. S. Patent No. 7,702,563 B2, filed April 20, 2010
with William Balson
This patent covers a proprietary system of ex ante risk control and real-time mark-to-market evaluation of structured financial contracts. It incorporates tools that enable real-time valuation of complex portfolios of option transactions. Dr. Rausser has applied this and related methods on behalf of several major corporations in order to design and implement decision-support risk analysis and structured financial contracts that separate market risk from credit risk.

Coleman Fung Center Research Grant

In 2011, on the basis of his work on OTC derivatives, Dr. Rausser received a grant from the Coleman Fung Center for Risk Management Research at the Institute of Business and Economic Research at the University of California, Berkeley. The purpose of the grant was to fund research on historical OTC derivatives indices.

Risk-Based Clearing: The Case of American International Group

Co-author: W. Balson
In preparation (2013)
Drs. Rausser and Balson demonstrate how a risk-based clearing methodology would change the economic incentives of a firm that actively participated in over-the-counter (OTC) derivative markets. They propose that clearing should be insured by a third-party guarantor collateralized by a risk-based performance bond in order to assure contract performance. The proposed framework would move the performance of the OTC market toward transparency, capital efficiency, collateral sufficiency, dynamic adjustment to changing risk levels, and efficient pricing of credit and market price risk. Using a well-publicized empirical example, that of American International Group (AIG), they illustrate the application of variable rate–based margins and show that centralized clearing is feasible for OTC contracts.

Comparing American and European Regulation of Over-the-Counter Derivative Securities

with K. Janda
European Finance and Accounting Journal 6(4): 1–13 (2011)
This paper compares American to European regulations of over-the-counter derivatives. In particular, it compares the US Dodd-Frank Wall Street Reform and Consumer Protection Act with the European market’s infrastructure regulation. While the overall approach taken by both regions is similar, certain differences in the regulatory approach may lead to the possibility of regulatory arbitrage or inconsistent requirements due to their extraterritorial effects. Regulatory authorities will have wide scope and authority to interpret the legislations’ provisions.

Centralized Clearing for Over-the-Counter Derivatives

with W. Balson and R. Stevens
Journal of Financial Economic Policy 2(4): 346–59 (2010)
This paper focuses on the financial crisis that took place globally in 2008–09. It demonstrates that the systemic risk and possible cascading spillover effects of defaults can be avoided by an active trade-permissioning system that effectively controls potential systemic risk. An important contribution of this paper is to determine the effective price of risk, using analytical approximations based on Monte Carlo simulations. Dr. Rausser and his co-authors demonstrate that optimal clearing fees can be designed to take into account not only default risk but also systemic risk. Two alternative pricing schemes are specified, both of which are shown to estimate default risk efficiently. In contrast to current proposed governmental regulations, the comprehensive clearing structure proposed here—including the market microstructure for a clearing house—will not drive out “good” OTC derivative trading along with “bad” trading.

Conference Presentations

Modeling OTC Derivatives

Agricultural and Resource Economics Departmental Seminar, UC Berkeley, November 2009

 


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