Market-based methods for monetizing uncertainty reduction

  • Roger Cooke
  • Alexander GolubEmail author


New measurement systems are often expensive and need a solid economic justification. Traditional tools based on the value of information are sometimes difficult to apply. When risks are traded in a market, it may be possible to use market instruments to monetize the reductions in uncertainty. This paper illustrates such market-based methods with a satellite system designed to reduce uncertainty in predicting soil moisture in the USA. Soil moisture is a key variable in managing agricultural production and predicting crop yields. Using data on corn and soybean futures, we find that a 30% reduction in the weather-related component of uncertainty in corn and soybean futures pricing yields a yearly US consumer surplus of $1.44 billion. The total present value of information from the satellite system for the USA—calculated with a 3% discount rate—is about $22 billion, assuming the system is in operation for 20 years. The global value of the improvements in weather forecasting could be $63 billion.


Value of information Options pricing SMAP Bachelier formula Black–Scholes-Merton model 

JEL Classification

C02 C44 C58 D80 D81 



This research was supported through NASA cooperative agreement number NNX17AD26A with RFF to estimate the value of information obtained from satellite-based remote sensing. Helpful conversations with Vanessa Escobar and Paula Bontempi are gratefully acknowledged.

Supplementary material


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Resorses for the FutureWashingtonUSA
  2. 2.American UniversityWashingtonUSA

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