Modelling of Agricultural Markets after an Exogenous Shock

• Applicant: Dr. Gunnar Breustedt
• Subject Area: Agricultural Economics, Agricultural Policy, Agricultural Sociology
• Term: since 2020
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 450972705

We propose a new modelling approach for exogenous shocks on agricultural markets. Our agent-based modelling (abm) allows for analysing the time and conditions necessary for a market to find a new equilibrium or equilibrium-like state after a shock. In addition, we study which political interventions in the market may reduce welfare losses for market participants induced by a shock.This set of problems cannot be analysed appropriately be means of equilibrium market models such as the Walrasian auctioneer or game-theoretic approaches based on a Nash equilibrium. The reason is straightforward: Equilibrium models are not supposed to represent a market out of equilibrium, e.g. after a shock. Our abm, therefore, needs a conceptual substitute for the equilibrium. First, the concept of homeostasis seems promising. Second, for the market period after a shock the concept of allostasis seems suitable if the market develops towards homeostasis. Both concepts are from the field of medical science and biology. Lengnick’s (2013) macroeconomic abm seems a good starting point for the proposed modelling. But it should be simplified to a partial model representing only one (or few) agricultural market(s) without influencing other markets in the economy. In addition, the relationships between market participants should be as simple as in dynamic matching and bargaining games (DMBG) (Rubinstein and Wolinsky (1985) or Lauermann (2013)). However, producers and consumers should be paired several times for potential trading. DBMG do not use a central coordination mechanism like a Walrasian auctioneer or a Nash equilibrium. A preliminary abm already shows an endogenous development to an equilibrium-like state after different kinds of shocks. The next step is to define homeostasis and allostasis for the market and to run these concepts in the abm simulations. Afterwards shocks on a commodity market taking into account time for plant growth and stock management are simulated. Then interrelated markets such as piglet and hog markets as well as milk and cattle markets are simulated. For all these markets policy interventions are simulated that are supposed to improve the market’s reaction to a shock. ‘Improvement’ here stands for reducing welfare losses induced by a shock. Interventions are – for example – public price information on the market, public commodity stocks, export bans, market integration. Finally, we simulate a technological innovation that reduced transaction costs and information asymmetry on agricultural markets in developing countries, i.e. mobile phones. Does the innovation change the welfare, the distribution of welfare and the market structure, e.g. do middlemen become less relevant?

• DFG Programme: Research Grants