Price-Band Stabilization Programs and Risk: An Application to the U.S

The impacts of introducing a partial price stabilization scheme in the U.S. corn market are investigated by using a modified version of the bounded price variation model. Specifically, a model is developed and estimated that includes rational expectations of the first three central moments of the (truncated) equi-librium price distribution. The estimated model is used to simulate market equilibrium effects of introducing upper and lower price limits through a tax-subsidy scheme. The results show that corn producers are downside risk averse, and that market feedback effects of price stabilization can, at times, be more important than direct effects. Key words: downside risk aversion, price stabilization, rational expectations equilibrium