A game theoretic analysis of US rice exports under alternative

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A game theoretic analysis of US rice exports under alternative

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Louisiana State University
LSU Digital Commons

LSU Doctoral Dissertations

Graduate School

2002
A game theoretic analysis of U.S. rice exports under alternative Japanese and South Korean policy scenarios
Dae-Seob Lee Louisiana State University and Agricultural and Mechanical College

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Recommended Citation Lee, Dae-Seob, "A game theoretic analysis of U.S. rice exports under alternative Japanese and South Korean policy scenarios" (2002). LSU Doctoral Dissertations. 1830. https://digitalcommons.lsu.edu/gradschool_dissertations/1830
This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Doctoral Dissertations by an authorized graduate school editor of LSU Digital Commons. For more information, please [email protected]

A GAME THEORETIC ANALYSIS OF U.S. RICE EXPORTS UNDER ALTERNATIVE JAPANESE AND SOUTH KOREAN POLICY SCENARIOS
A Dissertation
Submitted to the Graduate Faculty of the Louisiana State University and
Agricultural and Mechanical College in partial fulfillment of the
requirements for the degree of Doctor of Philosophy in
The Department of Agricultural Economics and Agribusiness
by Dae-Seob Lee B.S., Kangwon National University M.B.A., Kangwon National University M.S., University of Arkansas
May 2002

ACKNOWLEDGMENTS I came to the United States of America seven years and some months ago. I have come here to study in the field of agricultural economics, especially international trade on agricultural commodities and pursue my Master’s and Ph.D. degrees with bottom of my heart. However, I have faced a lot of difficulties during my study, but a lot of people have helped me out with overcoming my shortcomings such as language barriers and cultural shock. I really need to thank these people. First of all, I would like to thank the Department of Agricultural Economics and Agribusiness for providing the assistantship stipend to obtain my Ph.D. degree. My deepest appreciation goes to my major professor, Dr. P. Lynn Kennedy, and his family. I really want to thank Dr. Kennedy for his patient and guidance in completing this research. In particular, he has been treating me as one of his friends. I also would like to thank to Dr. Michael E. Salassi, Dr. Hector O. Zapata, Dr. Richard Kazmierczak, Dr. W. Douglas McMillin, and Dr. Biswas Abhijit for serving on my committee. Special thanks goes to Dr. Williams for his time and patience and to Ph.D. candidate Deacue Fields II for his friendship and care. I also would like to thank the secretarial and computer staffs for their help and assistance during my stay at the Louisiana State University. Sincere thanks and appreciation go to my tough father, Seon-Ok Lee, my loving mother, Jeong-Sook Choi, and my father-in-law, Eu-Jin Jeong for allowing me to pursue my educational goals and their love. Finally, I have married to my wife, Young-Hee Jeong, for over four years. She has encouraged me pursuing my life goals with love. I really thank my wife and I love you. Of
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course, I love my two little babies, Hana Lee and Jeong-Hee Lee, I love you guys and thank you for your patience. Your dad is going to play with you guys more often.
Above all, I could not finish this without my sister, the last, Mi Lee and my mother-inlaw, the last, Bok-Soon Lee for their love and emotional support. And I wish I could visit their graves when they needed me. I am really sorry, and I will do anything you wished me to do.
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS...................................................................................................... ii
LIST OF TABLES .................................................................................................................. vi
LIST OF FIGURES............................................................................................................... viii
ABSTRACT............................................................................................................................ ix
CHAPTER 1. INTRODUCTION...............................................................................................................1 1.1. Introduction ..................................................................................................................1 1.1.1. Recent Changes .....................................................................................................4 1.1.2. U.S. Exports to Japan and Korea ...........................................................................6 1.2. Problem Statement........................................................................................................7 1.3. Justification ..................................................................................................................8 1.4. Objectives.....................................................................................................................9 1.5. Literature Review .......................................................................................................10 1.6. Outline of the Dissertation..........................................................................................16
2. JAPANESE AND KOREAN RICE ECONOMIES...........................................................17 2.1. Japanese and Korean Rice Economies ........................................................................17 2.1.1. Korean Rice Farm Structure ................................................................................20 2.1.2. Japanese Rice Farm Structure ..............................................................................23 2.2. Rice Supply and Demand in Japan and Korea ............................................................26 2.2.1. Japan....................................................................................................................26 2.2.2. Korea ...................................................................................................................30 2.3. Japanese and Korean Rice Policy Changes.................................................................31 2.3.1. Japan....................................................................................................................31 2.3.2. Korea ...................................................................................................................37 2.4. U.S. Rice Exports .......................................................................................................42 2.4.1. Government Rice Programs .................................................................................44 2.4.2. Government Programs for U.S. Rice Exports ......................................................49
3. THEORETICAL FRAMEWORK .....................................................................................53 3.1. Supply and Demand Specification..............................................................................53 3.1.1. Supply Model ......................................................................................................57 3.1.2. Demand Model ....................................................................................................59 3.1.3. The Specification for U.S. Export Demand..........................................................61 3.1.4. Estimation and Evaluative Statistics ....................................................................63 3.2. Determination of Political Weights.............................................................................64 3.2.1. Political Preference Function (PPF).....................................................................64 3.2.2. Derivation of the Political Weights......................................................................72 3.3. Game Theoretic Approach..........................................................................................72 3.3.1. Axioms of Game Theory .....................................................................................73
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3.3.2. Basic Noncooperative Game Theoretic Model ....................................................75 3.3.3. Dynamic Game ....................................................................................................77 3.3.4. The Difference Game...........................................................................................79 4. EMPIRICAL ANALYSIS .................................................................................................87 4.1. Econometric Estimation..............................................................................................87 4.1.1. Empirical Estimation and Interpretation ..............................................................87 4.1.2. Model Specification and Validation.....................................................................92 4.2. Derivation of Political Weights...................................................................................98 4.3. Empirical Game Theoretic Analysis .........................................................................104 4.3.1. Game Theoretic Procedure ................................................................................104 4.3.2. The Base ............................................................................................................104 4.3.3. Scenario Analysis ..............................................................................................109 5. SUMMAY AND CONCLUSIONS .................................................................................124 5.1. Summary and Concluding Remarks..........................................................................124 5.2. Study Limitations and Further Research Opportunities ............................................136 REFERENCES......................................................................................................................138 APPENDIX 1. GAMS PROGRAM USED FOR THE MODEL .........................................146 APPENDIX 2. SAS PROGRAM USED FOR THE ECONOMETRIC ESTIMATION......159 APPENDIX 3. DATA USED IN THE STUDY ..................................................................163 VITA .....................................................................................................................................172
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LIST OF TABLES 1.1 Japanese MA Obligation for Rice (MT) ..............................................................................5 2.1. Farm Structure in Japan and Korea, Selected Years .........................................................18 2.2. Rice Production Cost for Selected Years in Japan, Korea, and the U.S. ...........................19 2.3. Number of Korean rice Farm Households by Farm Size, Selected Years .........................20 2.4. The Number of Rice Farms by Type in Korea..................................................................21 2.5. Rice Farm Labor Trends in Korea ....................................................................................22 2.6. Number of Japanese Rice Farm Households by Farm Size...............................................23 2.7. The Number of Farms by Type in Japan, 1990-1999........................................................24 2.8. Japanese Rice Farm Labor by Age, 1999..........................................................................25 2.9. Rice Production Costs by Farm Size in Japan, 1998.........................................................25 2.10. Supply and Utilization of Rice in Japan, 1980-2000.......................................................27 2.11. Supply and Utilization of Rice in Korea, 1980-2000 ......................................................30 2.12. Farm Program Base Acres, Program Acres Idled, and Participation,
1982/83-1999/2000..........................................................................................................48 4.1. Empirical Results of Production and Consumption ..........................................................92 4.2. Specification and Model Validation Tests ........................................................................97 4.3. Political Weights for the Three Countries.......................................................................103 4.4. Simulation Results of the Payoff Functions for the Base................................................108 4.5. Simulation Payoffs under CCCUS ...................................................................................112 4.6. Simulation Results of the Nash Equilibrium under CCCUS.............................................113 4.7. Simulation Payoffs under MAPUS...................................................................................114 4.8. Simulation Results of the Nash Equilibrium under MAPUS ............................................114 4.9. Simulation Payoffs under FDPUS....................................................................................115
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4.10. Simulation Results of the Nash Equilibrium under FDPUS ...........................................116 4.11. Simulation Payoffs under CMPUS.................................................................................117 4.12 Simulation Results of the Nash Equilibrium under CMPUS ...........................................118 4.13 Simulation Payoffs under CFPUS ...................................................................................119 4.14 Simulation Results of the Nash Equilibrium under CFPUS.............................................120 4.15 Simulation Payoffs under MFPUS ..................................................................................121 4.16 Simulation Results of the Nash Equilibrium under MFPUS............................................122 4.17 Payoff Summary............................................................................................................122
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LIST OF FIGURES 2.1. Japanese and Korean Imports and the World Rice Price...................................................29 3.1. Determination of Optimal Policy with Political Weights..................................................69
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ABSTRACT As a result of the Uruguay Round (UR), the impact on the international rice market is profound. In addition, another round of the WTO trade negotiations has started and the impacts of potential policy changes on rice trade are unknown. The major U.S. benefit of the UR has been the access to the Japanese market. However, the U.S. share of this import market has been unstable and the share of Korean rice market is zero percent. Therefore, this study attempts to analyze the potential implication of U.S. rice exports to Japan and Korea. The Japanese and Korean rice economies as well as U.S. export demand are analyzed using empirical supply and demand models. This study captures the dynamics inherent in supply and demand of the Japanese and Korean rice sectors. For the study, the supply parameters are estimated using two stage least squares (2SLS), and the demand equations are estimated using ordinary least squares (OLS). Since rice is a political commodity, this study incorporates the political influence of various interest groups in the policy-making process. The analysis measures the pattern of the implicit political weights given to the interest groups, considering a Political Preference Function (PPF). In the final stage, the estimated elasticities and political weights are incorporated in a noncooperative dynamic game framework to analyze the possible impacts of policy changes in the three countries. This study analyses various policies, including several reasonable scenarios regarding changes in Japanese and Korean tariff equivalents from 2% to 8% with respect to U.S. export programs, such as credit guarantee and market development programs. The results show that the best export policy option from the U.S. perspective is obtained at a 4% tariff reduction for Japan and Korea under a combination of U.S. market access
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JapanNash EquilibriumStudyRice ExportsKorea