The New Policy Analysis Framework

(Project Leaders: Konstantinos Giannakas and Murray Fulton)

A main focus of CAFIO-PRG research is on the development of a novel, integrated, multi-market framework of policy analysis that explicitly accounts for (i) heterogeneous consumer preferences or/and incomes; (ii) heterogeneous producers (producers differing in education, experience, location and quality of land, management skills, technology adopted etc.); (iii) imperfectly competitive input suppliers, processors or/and retailers; and (iv) links and interactions between the agri-food supply channels of interest (i.e., markets of the regulated product and its relevant substitutes and complement products and services.

The new policy analysis framework will be based on various models of heterogeneous agents (producers and/or consumers) and imperfectly competitive firms developed by Professor Giannakas and his colleagues and students over the past decade to analyze the economic effects of the introduction of genetically modified products under different regulatory and labeling regimes; the economics of innovation and intellectual property rights; the market for organic products; the role of cooperatives in the agri-food system; conservation compliance on highly erodible lands; the market and welfare impacts of country-of-origin-labeling; and consumer demand for quality-differentiated products.

CAFIO-PRG research will integrate this accumulated knowledge and experience into an empirically relevant policy analysis framework that can be adapted to encompass all relevant segments/participants in the agri-food system affected by the policies in question

Novelty, Relevance & Significance. The explicit consideration of agent heterogeneity in CAFIO-PRG policy research represents a significant departure from the representative consumer and representative producer that have been the foundation of most of the literature on policy analysis. Indeed, through its reliance on the conventional models of representative consumers and producers, traditional agricultural policy analysis has (implicitly or explicitly) assumed a homogeneous response to, and impacts from, various policies affecting the agri-food marketing system.

It is well-known, however, that both consumers and producers are highly heterogeneous groups and that this heterogeneity is expressed through highly diverse demands for and supplies of products, programs, services, and policies. In this context, the focus on representative consumers and/or producers inhibits both the determination of the effects of different policies on different consumer and producer groups as well as the understanding of the widely different positions held by seemingly similar groups in policy negotiations.

In addition to enhancing the empirical relevance of policy analysis by allowing the research to account for key elements of the increasingly industrialized agri-food system, the explicit consideration of consumer and producer heterogeneity will enable the analysis to disaggregate these interest groups and determine the effects of different policies on different consumers and producers (e.g., consumers of different products, low- versus high-income consumers, more- versus less-efficient producers, etc.).Better measures (and understanding) of the effects of a policy can lead to improved policy design, enhanced efficiency, increased effectiveness, and reduced policy failures.

Before concluding this part, it is important to note that the focus on the links and interactions between the regulated products and their close but imperfect substitutes is a departure from both the general equilibrium and the partial equilibrium approaches employed extensively in policy analysis. Specifically, the proposed framework is neither a general equilibrium nor a partial equilibrium in the sense that it does not focus either on the whole economy or a single market. Instead,it is a flexible, multi-market framework that can be adapted to analyze any number of supply channels of interest i.e., any number of regulated products along with their substitutes and/or complement products.