I’m confused: why doesn’t variability cause any trouble in the standard models? It seems that if producers are risk-averse, it results in less production than otherwise.
Uncertainty about future aid introduces a cost, and certainly recipients will be better off if aid is predictable.
But if there were no externalities from production, then I think the presence of variable aid still always makes you better off on average than no aid. Worst case, you need to invest in net-producing capacity anyway (in case aid disappears), which you can finance by charging higher prices if free nets disappear.
The main problem with that is that if aid disappears, there will be a wealth transfer from net consumers to net producers. Given risk aversion, that stochastic transfer is bad for everyone. So you’d either want to insure against aid variability, or purchase an option on nets in advance. If you can’t do either of those things but nets can be stored, then you can literally manufacture the nets in advance and sell them to people who are concerned that net prices may go up, and that’s still a Pareto improvement. If you can’t do that either, then you could lose, but realistically I think rational expectations is the weaker link here :)
I’m confused: why doesn’t variability cause any trouble in the standard models? It seems that if producers are risk-averse, it results in less production than otherwise.
Uncertainty about future aid introduces a cost, and certainly recipients will be better off if aid is predictable.
But if there were no externalities from production, then I think the presence of variable aid still always makes you better off on average than no aid. Worst case, you need to invest in net-producing capacity anyway (in case aid disappears), which you can finance by charging higher prices if free nets disappear.
The main problem with that is that if aid disappears, there will be a wealth transfer from net consumers to net producers. Given risk aversion, that stochastic transfer is bad for everyone. So you’d either want to insure against aid variability, or purchase an option on nets in advance. If you can’t do either of those things but nets can be stored, then you can literally manufacture the nets in advance and sell them to people who are concerned that net prices may go up, and that’s still a Pareto improvement. If you can’t do that either, then you could lose, but realistically I think rational expectations is the weaker link here :)