Tuesday, October 19, 2010

Rakesh Vohra on repugnant contracts for onions

Over at the Leisure of the Theory Class,  Rakesh  Vohra takes up the question of the day, which is Onions, and in particular, Public Law 85-839, which states

"No contract for the sale of onions for future delivery shall be made on or subject to the rules of any board of trade in the United States."

He invites us to consider why that might be a repugnant transaction. (And in the comments, a reader raises the related question of futures contracts on Hollywood movies, and speculation in general...)


Anonymous said...

That is Rakhesh Vohra, not Rajiv Vohra.

Economists Do It With Models said...

It was never really that the transaction was seen as repugnant per se, but rather that onion farmers were convinced that the Chicago Mercantile Exchange was manipulating the market on onions and thus somehow responsible for falling onion prices. (I don't think this hypothesis really held up in practice, but there is evidence that there was a shady onion incident shortly before the legislation was passed.) They protested and lobbied and got a young Gerald Ford to go to bat for them in Congress, and so we've had a no onion futures law on the books for over 50 years.

Economists have looked at this issue, and the consensus mostly seems to be that the lack of onion futures actually leads to more volatility in the price of onions. What's really repugnant here is the degree to which special interests were able to impact policy. (Well, that and the fact that I actually have information on onion futures or the lack thereof.)

Tim Worstall said...

The shorter version of answer two is that Nixon was right. Gerarld Ford just wasn't all that bright: maybe it was too much football without his helmet.

Anonymous said...

you've still got his first name wrong: it's "Rakesh" and "Rakhesh". come on!