Dr Adelina Gschwandtner

Taste and health benefits key reasons for buying organic food

Shoppers usually claim they buy organic food because it is environmentally friendly and has higher standards of animal welfare. However, research has found that in reality better taste and health benefits are key motivators for buying organic produce.

Lecturer Dr Adelina Gschwandtner from the School of Economics, analysed the organic shopping habits of consumers in Canterbury to discover their price thresholds and rationale for buying organic foods such as chicken, milk, bananas, carrots and apples.

In total 104 individuals were surveyed about their organic food preferences and buying habits after they had left one of three major supermarket chains. They were asked about their willingness to pay more for organic food and their reasons for doing so, or not doing so, and their till receipts were analysed.

The data found that were spending an average of £3.84 of their total bill on organic produce, around 26% of the total. This is higher than many previous studies have found and suggests attitudes towards purchasing organic food are changing.

Indeed, when buyers were asked about how much of a willingness they have to pay for organic produce most responses were at an average of a 13% premium on non-organic products. However, in reality most consumers actually paid an average of 9% more for organic products.

While there is a gap between the premium people say they will pay for organic products and what they actually will spend, the fact people will pay more is notable.

However, meat items, where price premiums are often highest, remain a small part of organic sales, with just 3% of meat products sold from organic producers, suggesting people are still unwilling to pay more for meat items labelled organic.

Despite this when asked why they were willing to pay more for organic items most consumers stated they bought items for ‘non-personal’ benefits such as the belief organic food is environmentally friendly and meat is produced in more ethically acceptable ways.

But when the data from the surveys was analysed about what influences decisions to buy organic food it showed that ‘selfish’ reasons such as improved taste and health benefits are in fact the strongest drivers to buying organic food.

The findings could help supermarkets, organic food producers and even governments reconsider how they advertise organic produce to appeal to buyers by promoting taste and health benefits, rather than focusing on the environmental benefits of organic food, as is usually promoted.

The paper, entitled The Organic Food Premium: A Local Assessment in the UK, has been published in the International Journal of the Economics of Business (IJEB).

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Article by Dan Worth, University of Kent Press Office

Dr Maria Garcia-Alonso

Strategic trade control contract award

Dr Maria Garcia-Alonso from the School of Economics has been awarded a partnership in a framework contract for the provision of expertise on strategic trade control-related activities. The framework contract will provide the Joint Research Centre of the European Commission with technical expertise and support from external academia experts with proven experience in the field for thematic multi-disciplinary research work, preparation of training material and delivery of training, editorial and web support content.

The contract will be led by Professor Dr Quentin Michel from Université de Liège with other partners from King’s College London, Stockholm International Peace Research Institute, the Institute of Customs and International Trade Law and Dr Angelo Minotti.

Dr Alex Klein

Was Domar Right? Serfdom and Factor Endowments in Bohemia

by Alexander Klein and Sheilagh Ogilvie, discussion paper KDPE 1717, October 2017.

Non-technical summary

What causes labor coercion? It appears informally in most economies, but in some it prevails as a formal system of slavery or serfdom, with wide economic repercussions. Serfdom existed in most European economies for long periods between c. 800 and c. 1860. In many serf economies, most rural families were obliged to do coerced labor for landlords. Since the rural economy produced 80 to 90 percent of pre-industrial GDP, serfdom affected the majority of economic activity. Labor coercion under serfdom reduced labor productivity, human capital investment, innovation, and living standards, so much so that its varying intensity is widely regarded as a major determinant of divergent European economic performance between 1350 and 1861. One well-known explanation is Domar’s (1970) conjecture that coerced labor systems were caused by high land-labor ratios. In economies where wages were high because labor was scarce relative to land, Domar argued, landowners devised institutions such as serfdom and slavery to ensure they could get labor to work their land at a lower cost than would be the case in a non-coerced labor market. To the best of our knowledge, this paper provides the first investigation of coerced labor under serfdom using quantitative evidence and multivariate statistical approaches. We hold constant political-economy variables – power, the state, and the institutional framework legitimizing labor coercion – by analyzing a specific serf society: Bohemia (part of the modern Czech Republic). We calculate quantitative measures of labor coercion, the land-labor ratio, urban potential, and other socio-economic characteristics of over 11,000 serf villages, covering the entirety of Bohemia in 1757. We use these data and the theoretical framework proposed by Acemoglu and Wolitzky (2011) to investigate how the land-labor ratio affected labor coercion, controlling for other causal variables.

We find that where the land-labor ratio was higher, labor coercion was also higher, and thus that the Domar effect outweighed any countervailing outside options effect. The net effect was not huge, but nor was it trivial, and it was magnified when labor coercion included both human and animal energy. The relationship between the land-labor ratio and labor coercion under serfdom displayed a nonlinear shape, arising from the technical limits on coercion in conditions of extreme labor scarcity. We also present evidence which supports Acemoglu and Wolitzky’s conjecture that serfdom was strong in eastern Europe partly because the urban sector was too weak to generate outside options for serfs that reduced the productivity of labor coercion.

Our findings demonstrate that factor proportions affected coercion. Even if political economy factors play a dominant role in explaining differences across countries and many other variables influenced landlord extraction from serfs, the land-labor ratio influenced labor coercion and thus contributed to serfdom as a broader institutional system. This in turn implies that institutions are influenced, at least to some degree, by economic fundamentals.

You can download the complete paper here.

Dr Alfred Duncan

Disputes, Debt and Equity

by Alfred Duncan and Charles Nolan, discussion paper KDPE 1716, July 2017.

Non-technical summary

We provide a new justification for the widespread use of debt finance as an alternative to equity finance. We show that when the returns of investment projects can only be partially observed by outside financiers, and this partial observation is itself costly, then the optimal contract agreed between entrepreneurs and outside financiers takes the form of a standard debt contract.

This finding builds on existing literature that had shown the benefits of debt finance in settings where outside financiers were either unable to commit to future audit strategies, or were unable to implement audit strategies with randomization. Our model builds on this literature by extending the prediction of debt finance as optimal to a wider range of settings, helping to match empirical regularities.

We produce numerical estimates of contract terms for a simulated version of the model; we show that the model can reproduce key features of the data including leverage, interest rate spreads, and probabilities of default. We also show that in a special case of our model, closed form solutions for leverage and interest rate spreads can be described in terms of model parameters.

You can download the complete paper here.

A new home for our school

The School of Economics is excited to reveal plans for a move to a new building, which will provide a stronger visual focus, identity and community for the School. In particular, space which is open to all the School’s students will for the first time allow its undergraduate students a physical presence within that community. The building will provide the School with a modern, identifiable home.

The building will house improved facilities for students and staff, such as social spaces, meeting rooms and an IT suite. Two floors of one wing will house shared teaching space and the rest of the building will be dedicated for the School’s use.

It is planned the building will be ready in time for the start of the 2019-20 academic year.

Take a look at our website to see further details and architect’s images.

Dr Alex Klein

A Long-Run Perspective on the Spatial Concentration of Manufacturing Industries in the United States

by Nicholas Crafts and Alexander Klein, discussion paper KDPE 1715, August 2017.

Non-technical summary

It is well-known that patterns of regional specialization and the spatial concentration of manufacturing industries have changed markedly over time. Kim and Margo (2004) describe a trajectory where regional divergence developed in the context of industrialization during the late 19th and early 20th centuries but was then superseded by regional convergence in the second half of the 20th century. Holmes and Stevens (2004) stress that this latter phase is notable for the decline of the manufacturing belt in which 70 per cent of manufacturing employment was located in 1947 but only 40 per cent by 1999. Since Kim wrote his paper, which has become the standard reference on the topic, there have been important developments in the measurement of spatial concentration. Ellison and Glaeser (1997) explained that it is important to control for differences in the size distribution of plants when measuring spatial concentration and developed an index in which a measure of raw geographic concentration is modified by taking account of the plant Herfindahl index. An important refinement to the basic EG index is to take account of the geographical position of regions through allowing for ‘neighbourhood effects’. This leads to the spatially-weighted version of the EG index proposed by Guimarães et al. (2011) which represents a significant advance on Hoover’s localization coefficient.

In this paper we re-examine long-run trends in the spatial concentration of U.S. manufacturing industries over the long run. In particular, we construct a new dataset which permits the calculation of a spatially-adjusted version of the EG index at both SIC2 and SIC3 levels for selected census years from 1880 through 1997. Several important new results emerge from this exercise. First, we find that average spatial concentration was much lower in the late 20th than in the late 19th century and that this was the outcome of a continuing reduction over time.

Second, the persistent tendency to greater spatial dispersion was characteristic of most manufacturing industries. Third, even so, economically and statistically significant spatial concentration was pervasive throughout this period.

You can download the complete paper here.

Professor Iain Fraser

Brazil nuts are rocketing in price- here’s why

Sometimes the price of certain foods rise suddenly and exponentially. For example, earlier this year it was iceberg lettuce, broccoli and courgettes in the UK, while in the US and Canada it was cauliflowers and lettuce, and more recently there have been sharp rises in the price of avocados. And it may only be a matter of time until we hear about an increase in the price of wine from France and Italy as a result of the poor grape harvest in 2017.

Currently spiking in price are Brazil nuts: the price of the nuts rose 61% during the middle of 2017. Is this another example of price volatility that consumers will have to get used to, or are Brazil nuts a special case?

Factors affecting supply
Brazil nuts are harvested from the Brazil nut tree that grows only in specific Amazon rainforest locations in key producing regions in Bolivia, Brazil and Peru. The industry within each country differs to a certain extent, but the basic principles of collection and production are very similar. The nuts are collected by groups of foragers from December until May, who travel into the rainforest to collect the cocos (pods) containing the nuts that have dropped from the tree. The harvested nuts are then supplied to intermediaries who sell them on.

There are several aspects of this supply chain that are specific to the Brazil nut industry and which can cause problems. They are often found in remote locations, and require at least 12 years growth before they yield any nuts. The trees can grow to at least 50 metres tall, and successful pollination is dependent on specific type of bee.

Why the sudden spike in prices? Quite simply, it was because of a drought in the Amazon brought about by the cyclical El Niño weather pattern that affects the entire Pacific region. A lack of rainfall means that the cocos drop from the trees earlier in the season, resulting in fewer and smaller kernels, which compromises supply of the full-size nuts the market seeks. In fact, the extent of the supply shortfall is such that Brazil has become a net importer of Brazil nuts, which in turn only further exacerbates the global scarcity of the nuts, pushing up prices.

Rising consumer demand
While this is a compelling supply-side story to explain the recent increase in price, this is not the only reason. There has also been a rapid increase in demand for nuts, as they have attracted the attention of health conscious consumers. Nuts are in demand as part of a healthy diet, and some have gained a reputation as “superfoods”. Brazil nuts, for example, are an excellent source of selenium, which is good for the skin, and can be consumed as part of a gluten-free and vegetarian diet, which would exclude other sources of selnium in whole grains or meats.
If the price of Brazil nuts remains relatively high we may see manufacturers substitute these nuts with others in products that feature them – as is the case with Eat Natural bars, the wrappers of which currently mention the Brazil nut harvest failure and a temporary change of ingredients. Will consumers be prepared to accept this type of substitution?

Is this a special case?
Almost certainly some commodities, in any given market, are going to be subject to situations where prices appear to increase out of line with expectations. But in many cases the reasons that cause these price events are short lived and nothing out of the ordinary as far as agricultural production is concerned. In the case of Brazil nuts the drought in the Amazon is another example of a weather event causing disruption to supply, occurring at the same time as strong demand brought about by changing consumer preferences.

Such price movements may be shorter – or longer-lived. The recent shortage of courgettes and lettuce is already forgotten by most people. The speed with which new supply can be grown and harvested dictates how markets respond to demand. Similarly, there may well be a significant growth in Brazil nut supply in 2018 if the weather and growing conditions change back to their suitable baseline before El Niño.

If we consider food price indices more generally, such as those published by the UN’s Food and Agriculture Agency, we can see that global commodity prices have in fact been lower throughout 2017 compared to the period 2007–2008, which saw very rapid price increases for cereals and rice. It has been argued that at the root of these price rises was poor policy-making decisions, such as incentives to encourage growing biofuels rather than crops for human consumption, leading to under-supply and consequent price spikes observed during that period.

The relative strength of a currency has an impact on the cost of imports. This means we need to be careful when drawing inferences about food prices based on one-off events, when by and large the price of food – when removed from other factors – is still in fact relatively stable and low by historical standards.

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Article by Iain Fraser, Professor of Agri-Environmental Economics.

 

Open Days 2017

Thank you to everyone who came to one of our Open Days this year.  As promised, here is a link to the School of Economics presentation slides: https://www.kent.ac.uk/economics/events/open-day-oct-17.pdf

We hope you enjoyed your day at Kent and found answers to your questions, however, if you have any further queries, please do not hesitate to contact us:

Kent Workshop on Networks in Economics

On Friday 29 September, the School of Economics hosted a workshop on the economics of networks. Organised by Nizar Allouch and Bansi Malde, the workshop brought together leading researchers working on both theoretical and empirical topics within this area. The speakers were Sanjeev Goyal (Cambridge), Yann Bramoullé (Aix-Marseille School of Economics), Gabrielle Demange (EHESS and Paris School of Economics), Cynthia Kinnan (Northwestern), Friederike Mengel (Essex) and Julien Labonne (Oxford).

Overall, the workshop was a success, with around 40 attendees from the School, and from other UK universities including Warwick, Queen Mary, Oxford, East Anglia, Bristol, Leicester, Essex and Middlesex Business School. 

See the programme of the workshop here.

Thank you to Nizar Allouch and Bansi Malde for organising the workshop.