Optimal Collective Investment in Generic Advertising, Export Market Promotion and Cost‐of‐Production‐Reducing Research

Abstract

Optimal investment rules are developed for a producer agency investing in domestic‐market generic advertising, export market promotion, and cost‐of‐production‐reducing research. These rules are derived assuming either maximization of producers' surplus or social surplus. The form of the optimality rules differs according to which objective is pursued. Fixed producer agency budgets are also allowed by incorporating a constraint limiting total expenditure on the three activities. Addition of such a constraint substantially alters the structure of the optimal investment rules. Differences in these rules highlight the importance of accounting for the financing mechanism when modeling optimal checkoff fund investment decisions. Optimality rules are simulated using data for the Canadian beef sector. Results suggest historic underinvestment in domestic‐market generic advertising but overinvestment in export market promotion. Sensitivity of simulation results underscores the difficulty in assessing optimality of historic producer investment in cost‐of‐production‐reducing research.