TWO ESSAYS ON UNCERTAINTY (NATURAL GAS CONTRACTS, SPECULATION, FUTURES MARKET)

These essays are concerned with the properties of the market equilibrium in an uncertain environment. Both essays are motivated by policy issues. The first essay examines the extent to which the speculative storage of a commodity may serve as insurance against the effects of the shortfalls in supply. The second essay deals with the allocation of resources in the natural gas market.;The second essay is concerned with natural gas prices. The organization of the natural gas market differs significantly from the paradigm of exchange in a sequence of spot markets. An elaborate system of long term contracts governs the production and transportation of the commodity. The contracts have become a subject of interest because of the effect that they exert on the price of natural gas, and because of widespread abrogation of contracts in the gas industry.;The essay characterizes the contractual mechanism as a solution to an asymmetric information problem. Firm specific capital creates a need for a long term contractual commitment. The value of the commodity is a random variable that can be observed by the buyer but not the seller. This create a moral hazard. A contract that specifies a price that is not subject to revision ex post, along with a minimum required purchase, is shown to resolve the incentive problem.;Industry equilibrium is also characterized. Buyers choose contract parameters subject to the constraint that the expected value of the contract be at least the market clearing value. Firm supply curves are characterized as surfaces in contract space. Individual producers develop capacity to maximize expected profit, taking the expected value of a contract as given. The optimization decisions of buyers and sellers jointly determine the market clearing value of a contract, and total production capacity.;The first essay addresses the issue of whether the profit maximizing speculative storage effects allocations that are Pareto efficient. The results indicate that under a wide variety of circumstances, the storage decision of individual speculators, based on price signals received from competitive markets, results in allocations that are not even constrained Pareto efficient. By providing speculators with an incentive to alter the amount of storage that is undertaken and engaging in lump sum transfers between individuals, the government can increase the ex ante welfare of all individuals. The introduction of a forward market does not preclude the existence of inefficient speculative behavior.