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The Precautionary Principle (PP) and precautionary trade policies have been the focus of numerous agricultural-trade disputes between the United States and some of its major trading partners. Precautionary actions taken in world markets include bans on agricultural imports
including: a number of genetically engineered foods and feeds, beef hormones, and beef from countries whose herds are known to be infected with bovine spongiform encephalopathy (`mad-cow’ disease). The PP is an “act-then-learn” policy strategy, where policy interventions are taken and then scientific research is conducted to determine if the interventions should be maintained.
While the budding economic literature on the Precautionary Principle provides important insights, current studies rely on expected-utility theory. Thus, they do not distinguish between policy decisions taken in the presence of Knightian risk (known probabilities) and decisions taken in the presence Knightian uncertainty (unknown probabilities). An overwhelming body of research indicates that economic models that do not distinguish between Knightian uncertainty and Knightian risk fail to capture important aspects of economic behavior and can lead to faulty economic predictions.
The paper studies the impact of Knightian uncertainty and the PP on US agricultural trade by developing a model of US agricultural trade in which beliefs about economic uncertainties are represented by sets of prior probability distributions (as opposed to the single probability distribution of expected utility theory). We demonstrate that in such a world, in the absence of risk concerns, economic efficiency requires that the less ambiguity averse country absorb all of the uncertainty in its consumption pattern. The more ambiguity-averse country, on the other hand, optimally absorbs no ambiguity. An immediate corollary of this result is that a common prescription of the Precautionary Principle, no trade in uncertain products, can be Pareto optimal if the more ambiguity averse country chooses a non-stochastic production and consumption pattern in autarky.
About the Speaker
Tigran Melkonyan has received Bachelor and Master’s degrees in Applied Mathematics from Yerevan State University (Armenia) and a Ph.D. in Economics from Iowa State University (ISU). Currently, Tigran is an Assistant Professor in the Department of Agricultural and Resource Economics at the University of Maryland, College Park. Dr. Melkonyan’s primary research interests are in contract theory, decision theory, agricultural economics, food safety, industrial organization, game theory and international trade. Dr. Melkonyan has published (forthcoming and published) in the Review of International Economics, Journal of Economic Behavior and Organization, American Journal of Agricultural Economics, Canadian Journal of Agricultural Economics, and Journal of Regional Science.