TOWARD A POSITIVE ECONOMIC-THEORY OF HEDGING

The hedging models developed over the last half century are evaluated for their ability to explain the actual hedging behavior of the variou s economic agents. This evaluation shows a total lack of a reasonable positive model of hedging behavior. While each class of existing model s predicts some observed behavior, none is able to predict the broad r ange of actions that is easily observed in the real world. In this pap er I develop such a model and include a plausible and coldly rational economic explanation for why farmers don't hedge at all while merchand isers with identical risk attitudes will fully hedge.