Was Sandmo Right? Experimental Evidence on Attitudes to Price Uncertainty

Food price stabilization policies to decrease food price volatility[1] have been an important policy instrument in a number of developing countries after the global food crisis of 2007-08 and the sharp increase of food prices in 2010. Price stabilization measures are often implemented by governments under political pressure (Poulton et al., 2006), without careful justification for the high cost of implementation of such policies (Gouel, 2013). Recent empirical work finds mixed results on the impact of commodity price risk on household welfare: Bellemare et al. (2013) find that there would be a net welfare gain for rural households from price stabilization; Bellemare (2015) finds that increases in food prices cause food riots, but finds no significant effect for food price volatility, suggesting that policy makers need to focus on lowering food price levels rather than food price volatility.[1] We use the terms “volatility,” “fluctuation,” “risk,” and “uncertainty” interchangeably for variability of prices over time. Also, we focus mainly on staple food prices.