Annual Review of Resource Economics - Volume 12, 2020

The Annual Review of Resource Economics presents Professor Sir Angus Deaton in conversation with economist Dr. Gordon Rausser. Dr. Deaton is Senior Scholar and the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs and Department of Economics at Princeton University and Presidential Professor of Economics at University of Southern California. An applied economist, Deaton has made seminal contributions to the econometrics and estimation of demand systems, analysis of consumer behavior, understanding of commodity prices, the economics of health, nutrition and poverty, and most recently, deaths of despair and the future of capitalism, focusing on the United States. His work to improve welfare estimation in developing countries contributed to upgrading data collection efforts at the World Bank and other international agencies.

Forests have become an important carbon sink in the last century, with management and carbon fertilization offsetting nearly all of the carbon emitted due to deforestation and conversion of land into agricultural uses. Society appears already to have decided that forests will play an equally ambitious role in the future. Given this, economists are needed to help better understand the efficiency of efforts society may undertake to expand forests, protect them from losses, manage them more intensively, or convert them into wood products, including biomass energy. A rich literature exists on this topic, but a number of critical information gaps persist, representing important opportunities for economists to advance knowledge in the future. This article reviews the literature on forests and climate change and provides some thoughts on potential future research directions.

The world's forests provide valuable contributions to people but continue to be threatened by agricultural expansion and other land uses. Counterfactual-based methods are increasingly used to evaluate forest conservation initiatives. This review synthesizes recent studies quantifying the impacts of such policies and programs. Extending past reviews focused on instrument choice, design, and implementation, our theory of change explicitly acknowledges context. Screening over 60,000 abstracts yielded 136 comparable normalized effect sizes (Cohen's d). Comparing across instrument categories, evaluation methods, and contexts suggests not only a lack of “silver bullets” in the conservation toolbox, but that effectiveness is also moderate on average. Yet context is critical. Many interventions in our sample were implemented in “bullet-proof” contexts of low pressure on natural resources. This greatly limits their potential impacts and suggests the need to invest further not only in understanding but also in better aligning conservation with local and global development goals.

The food-energy-water (FEW) nexus is facing grand challenges in meeting increasing demand resulting from global changes in climate, economy, and population. Emerging technologies are expected to play a critical role in responding to these challenges. Focusing on four types of prominent emerging technologies (namely precision agriculture coupled with big data and machine learning, gene editing, second-generation biofuels, and agrivoltaics), this article reviews existing studies regarding opportunities and challenges of these emerging technologies to address issues of the FEW nexus. Drivers of innovation and adoption of these emerging technologies as well as the role of public policies that interact with these drivers are reviewed. Finally, this review also discusses research gaps that need to be filled to harness the potential benefits of these emerging technologies.

Studies examining pricing outcomes in the food retail industry are complicated both by the multiproduct nature of transactions and by the presence of highly concentrated food processing and retailing industries that mediate between relatively competitive farm product markets and the consumer market. In this review, we examine theoretical and empirical evidence for retail pricing and the vertical relationships that have emerged among retailers, food manufacturers, and farmers. We first focus our analysis on consumer behavior in multiproduct retail markets, including consumer search, habit formation, and reference pricing, and then discuss retail market outcomes for price discrimination, price fairness, and price obfuscation. We then turn to relationships between retailers and food manufacturers through bargaining outcomes, market foreclosure, and slotting allowances, and discuss the resulting implications for retail-price pass-through.

We appraise the current status of relational contract theory, along with associated empirical studies, with the goal of providing an orientation to the field to economists who may not have expertise in contract theory. We begin with a theoretical discussion focusing mainly on intuition and the usefulness of the theory for conceptualizing applied agricultural contracting problems. We also discuss current theoretical challenges and the current state of empirical research on relational contracts. We conclude by discussing potentially fruitful areas for future research.

The merger of Dow and DuPont, the acquisition of Syngenta by ChemChina, and the acquisition of Monsanto by Bayer have recently reshaped the global seed and biotech industry and caused concern about growing market concentration. This review documents market concentration in seed and agricultural biotech markets and discusses its causes and impacts. The available evidence suggests that concentration in seed markets varies strongly by crop and by country, while markets for biotech traits are considerably more concentrated. Complementarities between seed, biotech, and crop protection chemicals explain much of the observed structural changes in the industry, and new complementarities may be emerging with digital agriculture. Although growing concentration might in theory lead to higher prices and less innovation, evidence on this is currently limited; this tendency is also in part offset by the remedies imposed by competition authorities.

Much of neoclassical economics is concerned with prices—more specifically, with relative prices. Similarly, economists have studied behavior in the face of risk and uncertainty for at least a century, and risk and uncertainty are without a doubt a feature of economic life. It is thus puzzling that price risk—that is, unexpected departures from a mean price level, or price volatility—has received so little attention. In this review, we discuss the microeconomics of price risk. We begin by reviewing the theoretical literature, a great deal of which is concerned with the effects of unstable agricultural prices on the welfare of producers, consumers, and agricultural households. We then discuss the empirical literature on the effects of price risk on economic agents. We emphasize policy responses to agricultural price risk throughout, discussing price stabilization policies from both theoretical and empirical perspectives. Perhaps most importantly, we provide several suggestions for future research in the area of price risk given increasing risk on world agricultural markets due to both policy uncertainty and climate change.

The past decades have seen the development of a multitude of sustainability-related food labels aimed at reducing the existing information asymmetry between food practitioners and consumers regarding the sustainability impact on the food supply chain. Sustainability-related food labels can correct market failures and contribute to a more sustainable world. This review discusses the effectiveness of sustainability-related food labels in promoting more sustainable food consumption around the world. We start by discussing the sustainable development goals in the food area and the challenge of defining these labels. We then investigate the demand- and supply-side issues related to the effectiveness of such labels in promoting the sustainable development goals that the labels serve. Finally, we discuss the questions raised by the state of research and their implications for food practitioners, consumers, and policy makers. We then identify future research avenues.

The theoretical literature analyzing eco-label programs has focused mainly on how intricate interactions between firms, eco-label certifiers, and regulators shape these programs’ economic and environmental outcomes. Far less attention has been paid to the consumer side, which has typically been modeled very simply. Meanwhile, empirical researchers in behavioral economics, social psychology, and market research have accumulated a large body of empirical evidence that paints a rich, complex picture of that consumer. In this review, I survey a range of these empirical findings, as well as attempts by theorists to incorporate them in their models. The survey is organized around three themes: (a) varieties of consumer ignorance, (b) context dependence of consumer motivations, and (c) motivational spillover effects across time and people. I also touch on the relative importance of private and public benefits of eco-label programs and on the debate over whether the private benefits should even be counted in welfare.

We develop a theory of change for payments for environmental services (PES) to review their imminent strengths and weaknesses in light of a growing body of impact evaluation studies. We show that PES are probably at least as environmentally additional as other conservation tools, based on the limited evidence. The original vision of PES as being direct, flexible, and potentially effective remains valid, but PES design and implementation have to be upgraded in their economic functioning to better realize this potential. Adverse self-selection, inadequate administrative targeting, and ill-enforced conditionality constitute three key obstacles that may considerably hamper PES success. Policies such as spatial targeting to service density, threat and cost levels, and payment differentiation can alleviate the design challenges. PES site selection needs to further move into high-threat areas. Making adequate PES design choices also requires the political will to boost environmental effects.

Cost-benefit analyses have largely failed to demonstrate a positive benefit to cost ratio for programs designed to improve and protect water quality in the United States and European Union. At the same time, research from outside economics suggests that water quality ranks among the most urgent environmental concerns and highlights deep social and cultural connections to clean water. Exploring alternative explanations for this apparent water value paradox is essential to informing contemporary rulemaking and regulatory analyses, such as the Clean Water Act and the debated Waters of the United States (WOTUS) rule. I review contemporary advances in mainstream environmental economics relevant to the value of clean water, frontiers that have not yet been integrated into mainstream valuation methods, and pluralistic approaches from sociology, history, and moral philosophy that offer policy-relevant insights but do not fit neatly in cost-benefit frameworks of valuation. The review concludes with recommendations for improved water quality planning and policy in pursuit of a more comprehensive and pluralistic understanding of the value of clean water.

Spillovers among jurisdictions are ubiquitous and likely to increase with increasing population and consumption, so the centralization or decentralization of environmental governance is of pressing concern in a world of tightly linked socio-ecological systems. Spillovers play a key role in federalism analysis because they tend to reduce benefits from decentralization. Laboratory federalism, a common rationale for decentralization, has not proven successful as a model of local policy innovation. Given a national policy toward a public good, differences in preferences across jurisdictions may push national policy toward a quantity instrument rather than a tax instrument. Finally, the lack of interaction between environmental federalism analysis and studies of adaptive governance and linked complex adaptive systems leaves both literatures incomplete. The increasing urgency of global sustainability issues argues for linking insights from environmental federalism with the literature on linked socio-ecological complex adaptive systems.

Assets in the fossil fuel industries are at risk of losing market value due to unanticipated breakthroughs in renewable technology and governments stepping up climate policies in light of the Paris commitments to limit global warming to 1.5 or 2°C. Stranded assets arise due to uncertainty about the future timing of these two types of events and substantial intertemporal and intersectoral investment adjustment costs. Stranding of assets mostly affects the 20 biggest oil, gas, and coal companies who have been responsible for at least one-third of global warming since 1965, but it also affects carbon-intensive industries such as steel, aluminum, cement, plastics, and greenhouse horticulture. A disorderly transition to the carbon-free economy will lead to stranded assets and legal claims. Institutional investors should be aware of these financial risks. A broader definition of stranded assets also includes countries reliant on fossil fuel exports and workers with technology-specific skills.

The financial system could help achieve the global climate targets by aligning investments to sustainability. However, investors are largely exposed to carbon-intensive assets that could become stranded, thus delaying the low-carbon transition and bringing new sources of risk for financial stability, i.e., climate-related financial risks. Here, we discuss climate-related financial risks, the challenges they pose to traditional economic and financial risk assessment, and the implications for the implementation and feasibility of climate policies. We then present science-based approaches that introduce forward-looking climate risks and their deep uncertainty in financial risk management (e.g., via the climate value at risk, climate spread, climate stress-test). Finally, we present results of applications aimed at pricing climate risks in investors’ portfolios and calculating the largest losses that could lead to systemic risk, in collaboration with leading financial institutions.

Rising global demand for vegetable oil during the last few decades has led to a drastic increase in the land area under oil palm. Especially in Southeast Asia, the oil palm boom has contributed to economic growth, but it has also spurred criticism about negative environmental and social effects. Here, we discuss palm oil production and consumption trends and review environmental, economic, and social consequences in different parts of the world. The oil palm expansion has contributed to tropical deforestation and associated losses in biodiversity and ecosystem functions. Simultaneously, it has increased incomes, generated employment, and reduced poverty among farm and nonfarm households. Around 50% of the worldwide oil palm land is managed by smallholders. Sustainability trade-offs between preserving global public environmental goods and private economic benefits need to be reduced. We discuss policy implications related to productivity growth, rainforest protection, mosaic landscapes, land property rights, sustainability certification, and smallholder inclusion, among others.

Despite growing policy commitment and decades of extensive research, nutritional deficiencies remain a key challenge for health systems worldwide. In addition to causing significant personal costs for those affected, indirect effects, such as reduced overall human capital accumulation or losses in labor productivity, can impose substantial obstacles for the achievement of economic development goals. This review provides an overview of the impact of key interventions aiming to improve nutritional intake in order to reach better physical health and cognitive outcomes among children in developing countries. We argue that, although promising interventions exist, malnutrition is a complex problem, likely requiring a stronger focus on multifactorial approaches. Moreover, more research is necessary to maximize compliance and sustainability if interventions are to successfully transform into large-scale policy programs. We further discuss the emerging double burden of malnutrition as a key challenge for policy makers in resource-poor settings.

From the perspective of sending countries, international migrants are positively selected in terms of schooling, particularly in low-income countries. While emigration affects human capital accumulation, it also induces positive spin-offs in the form of remittances, incentives to acquire education, and diffusion of technology and democratic ideas. The net income implications for those left behind are uncertain. This article reviews the main transmission channels investigated in the existing literature and uses a standard development accounting framework to provide estimates of their relative strength and of their combined effect. Although skill biased, emigration increases the disposable income of those left behind in no fewer than three-quarters of the countries of the world. This result is robust to variations in the set of parameter values within a reasonable spectrum established in the empirical literature.

In urban areas around the world, increasing motorization and growing travel demand make the urban transportation sector an ever-greater contributor to local air pollution and greenhouse gas emissions. The situation is particularly acute in developing countries, where growing metropolitan regions suffer some of the world's highest levels of air pollution. Policies that seek to develop and manage this transportation sector—both to meet rising demand linked to economic growth and to safeguard the environment and human health—have had strikingly different results, with some inadvertently exacerbating the traffic and pollution they seek to mitigate. This review summarizes findings in the recent literature on the impacts of a host of urban transportation policies used in both developed- and developing-country settings. The article identifies research challenges and future areas of study regarding transportation policies, which can have important, long-lasting impacts on urban life and global climate change.

Despite the significant risks and uncertainties that farmers in developing and emerging countries face in their production process, efforts at encouraging them to adopt agricultural insurance to mitigate their production risks have mainly yielded little success. This article reviews the recent literature on the demand for agricultural insurance in developing and emerging countries, by presenting the state of uptake, drivers of the demand for it, and the potential welfare gains from it. Our review reveals that while risk aversion is necessary for the demand for agricultural insurance, liquidity constraints, rates of time preference, basis risk, and trust are equally relevant in explaining the demand for insurance in poor countries. An interesting observation is the increasing number of studies that employ randomized control trials to analyze farmers’ uptake of agricultural insurance in developing and emerging countries. Our comprehensive review finds some information gaps in the literature, and we propose some avenues for further research.

This review covers a nascent literature that experiments with survey design to measure whether the way in which we collect socio-economic data in developing countries influences the data and affects the results of subsequent analyses. We start by showing that survey methods matter and the size of the survey design effects can be nothing short of staggering, affecting basic stylized facts of development (such as country rankings by poverty levels) and conclusions drawn from econometric analyses (such as what the returns to education are or whether small farm plots are more productive than large ones). We describe some of the emerging best practices for conducting survey experiments, including benchmarking against the truth, delving into the error-generating mechanisms, and documenting the costs of different survey approaches.

The aim of this article is to review a number of issues related to uncertain population forecasts, with a focus on world population. Why are these forecasts uncertain? Population forecasters traditionally follow two approaches when dealing with this uncertainty, namely scenarios (forecast variants) and probabilistic forecasts. Early probabilistic population forecast models were based upon a frequentist approach, whereas current ones are of the Bayesian type. I evaluate the scenario approach versus the probabilistic approach and conclude that the latter is preferred. Finally, forecasts of resources need not only population input, but also input on future numbers of households. While methods for computing probabilistic country-specific household forecasts have been known for some time, how to compute such forecasts for the whole world is yet an unexplored issue.

In this review, we attempt to describe the evolution of integrated assessment modeling research since the pioneering work of William Nordhaus in 1994, highlighting a number of challenges and suggestions for moving the field forward. The field has evolved from global aggregate models focused on cost-benefit analysis to detailed process models used to generate emissions scenarios and to coupled model frameworks for impact analyses. The increased demand for higher sectoral, temporal, and spatial resolution to conduct impact analyses has led to a number of challenges both computationally and conceptually. Overcoming these challenges and moving the field forward will require not only greater efforts in model coupling software and translational tools, the incorporation of empirical findings into integrated assessment models, and intermethod comparisons but also the expansion and better coordination of multidisciplinary researchers in this field through better training of the next generation of integrated assessment scholars and expanding the community of practice.