Market-based methods for monetizing uncertainty reduction

Roger Cooke and Alexander Golub

Environment Systems and Decisions, 2020, vol. 40, issue 1, 3-13

Abstract: Abstract New measurement systems are often expensive and need a solid economic justification. Traditional tools based on the value of information are sometimes difficult to apply. When risks are traded in a market, it may be possible to use market instruments to monetize the reductions in uncertainty. This paper illustrates such market-based methods with a satellite system designed to reduce uncertainty in predicting soil moisture in the USA. Soil moisture is a key variable in managing agricultural production and predicting crop yields. Using data on corn and soybean futures, we find that a 30% reduction in the weather-related component of uncertainty in corn and soybean futures pricing yields a yearly US consumer surplus of $1.44 billion. The total present value of information from the satellite system for the USA—calculated with a 3% discount rate—is about $22 billion, assuming the system is in operation for 20 years. The global value of the improvements in weather forecasting could be $63 billion.

Keywords: Value of information; Options pricing; SMAP; Bachelier formula; Black–Scholes-Merton model (search for similar items in EconPapers)
JEL-codes: C02 C44 C58 D80 D81 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10669-019-09748-w

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