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Price Expectations and Supply Response

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  • Arnade, Carlos
  • Cooper, Joseph

Abstract

Price in agricultural supply equations is usually the expected price. In general, models of agricultural supply response assume that their representation of producer expectations is correct. If this assumption is wrong, the supply response parameter will have embodied within it an estimate of the expected price distortion, biasing the estimated parameter. Furthermore, no effort has been made in existing models to allow for heterogeneous price expectations. In almost every supply model, one price estimate is used to represent the price expectations of hundreds or thousands of producers, which could masks a wide range behavior among heterogenous producers. Rather than assuming the model’s representation of producer expectations is correct, the goal of this paper is to use revealed producer behavior to assist in the estimation of producer’s expected prices. To explicitly address producers’ formation of the expected price, this study jointly estimates the supply equation and the price expectation equation. The empirical application is a pooled time-series cross-section data analysis of U.S. wheat and corn supply data at the county level.

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Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 150490.

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Date of creation: 2013
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Handle: RePEc:ags:aaea13:150490

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Keywords: Agricultural Finance; Demand and Price Analysis;

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  1. Askari, Hossein & Cummings, John Thomas, 1977. "Estimating Agricultural Supply Response with the Nerlove Model: A Survey," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 257-92, June.
  2. Arnade, Carlos A. & Cooper, Joseph C., 2010. "Acreage Decisions When Risk Preferences Vary," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61005, Agricultural and Applied Economics Association.
  3. Shumway, C. Richard & Chang, A. Anne, 1980. "Supply Response Of Texas Field Crops: An Evaluation Of The Cet Linear Supply Model," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 5(02), December.
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