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Risk And Structural Change In Agriculture: How Income Shocks Influence Farm Size

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Author Info

  • Roberts, Michael J.
  • Key, Nigel D.

Abstract

Farm-level Census data and county-level income shock data reveal that past unexpected income shocks affect the rate of change in average farm size. Average farm size increases more quickly in counties experiencing negative income shocks as compared to counties experiencing positive income shocks. This result cannot be explained by perfect-market models, which predict farm size should adjust according to changes in the relative prices of labor and capital. We posit a model wherein cash flows affect liquidity, which in turn affects farm borrowing and capital costs. In the model, farms that do not face liquidity constraints benefit from negative income shocks because they reduce land values, so these farms expand while liquidity-constrained farms contract. Observed farm consolidation patterns and farm exit rates are consistent with a model wherein liquidity constraints affect small farms more than large farms.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2002 Annual meeting, July 28-31, Long Beach, CA with number 19661.

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Date of creation: 2002
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Handle: RePEc:ags:aaea02:19661

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Related research

Keywords: farm size; farm structure; income shocks; liquidity constraint; risk; Agricultural Finance; Industrial Organization;

References

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  1. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 111-164.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Thomas J. Sargent, 1979. ""Tobin's Q" and the rate of investment in general equilibrium," Staff Report 40, Federal Reserve Bank of Minneapolis.
  4. Philippe Aghion & Gilles Saint-Paul, 1998. "Uncovering Some Causal Relationships Between Productivity Growth and the Structure of Economic Fluctuations: A Tentative Survey," LABOUR, CEIS, vol. 12(2), pages 279-303, 07.
  5. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  6. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
  7. Huffman, Wallace E. & Evenson, Robert E., 2000. "Structural and productivity change in US agriculture, 1950-1982," Agricultural Economics, Blackwell, vol. 24(2), pages 127-147, January.
  8. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
  9. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
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Cited by:
  1. Margarian, Anne, 2010. "Nachbarschafts- Und Konjunktureffekte: Zur Aufgabewahrscheinlichkeit Landwirtschaftlicher Betriebe," 50st Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93961, German Association of Agricultural Economists (GEWISOLA).

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