SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS DECEMBER, 1988 OPTIMAL USE OF QUALITATIVE MODELS: AN APPLICATION TO COUNTRY GRAIN ELEVATOR BANKRUPTCIES

Qualitative models can be used for decision decision maker (regulator or loan officer) must making under uncertainty. This provides a choose among alternative actions (scheduling useful framework for evaluating the models. or not scheduling an extra audit, making or If the costs for every action/state of nature not making a loan) when the state of nature i combination are known, decisions made using unknown (the will e r survive or go a well-calibrated model would result in actual bankrupt, the loan will be collectible in full or costs being close to expected costs. In addi- result in a loss). tion, the actual cost can be compared to the This paper differs from previous studies in cost of perfect foresight actions, giving a that it explicitly recognizes that choice of ac-bound on the value of a better model. Applica- tion is a standard decision under uncertainty tion of these procedures is made using a logit problem. It is assumed that the decision model developed to predict Missouri country maker chooses actions which yield the highest grain elevator bankruptcies. expected value of the objective function. In contrast, other studies have considered only Key words: bankruptcy, country grain ele- that state of nature which has the highes