The Collapse of the Australian Wool Reserve Price Scheme

This paper examines the background to the collapse of price stabilisation under the Australian Wool Reserve Price Scheme in 1991/2, and draws out implications for the feasibility of Government backed price stabilisation schemes. Optimal control techniques are applied to the problem of valuing stabilisation stockpiles. Option pricing techniques are used to elucidate the incentives facing the industry, and to explain why the industry adopted policies that drove the scheme to its collapse.