Valuing Farm Financial Information

U(W,θ),

where W represents wealth or a composite commodity involving all goods other than the
commodity in question and is measured in dollars, and θ equals one if the farmer is in state a
where his/her records are kept, and θ equals 0 in state b where his/her records are lost. The
farmer can be in one of the two following states where W≥0:

Ua(W)=U(W,1)  or Ub(W)=U(W,0).                   (2)

It is assumed that the farmer prefers to be in state a where the records are in his/her possession,
represented by the equation

Ua(W)>Ub(W).                                (3)

The first order equation of the utility function is positive and the second-order equation is
negative meaning the farmer’s financial records are a normal good:

Ui" (W) < 0 < Ui'(W) where i=a,b .                        (4)

What value do irreplaceable financial records hold for the farmer? The measure used in
this article to determine the value of financial records is the minimum compensation, represented
by the bid price submitted in an experimental 2^nd price auction, that would induce the
participating farmer to accept state b in exchange for state a. The compensation amount is C(W)
and is defined by

Ub(W+C(W))=Ua(W).                         (5)

C(W) is assumed to exist or C(W) is infinite otherwise. If C(W) is infinite, there is no amount of
money the farmer is willing to be compensated by for the loss of his/her records.

The farmer’s value of his/her records could also be expressed as the maximum amount
the individual farmer is willing to be assured for the exchange from state b to state a. Ransom or

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