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Risk Response in Agriculture

In: The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies

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  • Jeffrey LaFrance
  • Rulon Pope
  • Jesse Tack

Abstract

Crop production is subject to supply shocks, and both expected and realized outputs as well as output prices are unknown when inputs are chosen. The process by which producers form expectations is difficult to model, especially when working with aggregate data. We present a necessary and sufficient condition on cost and technology to allow variable input demand equations to be specified as functions of input prices, quasi-fixed inputs, and total variable cost. These all are observable when inputs are committed to production, so that ex ante demands can be estimated with observable data. A flexible, exactly aggregable, and economically regular model of variable input demands is derived and applied to aggregate U.S. agricultural data for the period 1960-1999. We use the empirical results of this model to aid in the specification of a dynamic life-cycle model for agricultural producers facing output and output price risk, with investment in an off-farm, conditionally risk free asset, risky financial assets, savings, consumption, and agricultural production opportunities. This framework admits a coherent, structural, econometric model of input use, output production, savings, investment, and consumption for agricul-ture. We apply this model to U.S. data for the period 1960-1999. Ongoing work focuses on updating the data set to the 21st century and applying both components of the model at the state-level.

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This chapter was published in:

  • Joshua S. Graff Zivin & Jeffrey M. Perloff, 2012. "The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies," NBER Books, National Bureau of Economic Research, Inc, number perl10-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12108.

    Handle: RePEc:nbr:nberch:12108

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    Cited by:
    1. Nolan, Elizabeth & Santos, Paulo, 2012. "Insurance premiums and GM traits," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125942, International Association of Agricultural Economists.

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