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Transaction Costs, Farm Finance and Investment


  • Benjamin, Catherine
  • Phimister, Euan


An investment model of the farm firm is constructed which allows for adjustment costs in investment and transactions costs associated with new borrowing. The presence of transaction costs means that the financial and investment decisions of the farm are simultaneous, and hence that financial decisions affect investment. In contrast to the work on liquidity constraints, the structure of the model generates a classification of farms which is observable in the data. This model is compared with a model that assumes perfect capital markets. Both models are estimated and tested using a balanced panel of 3,650 French farms over the period 1989-1993. The specification based on the perfect capital market assumption is rejected. The sample selection criterion implied by the transaction costs model allows the estimation of an empirically acceptable Euler equation for investment. Copyright 1997 by Oxford University Press.

Suggested Citation

  • Benjamin, Catherine & Phimister, Euan, 1997. "Transaction Costs, Farm Finance and Investment," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 24(3-4), pages 453-466.
  • Handle: RePEc:oup:erevae:v:24:y:1997:i:3-4:p:453-66

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    References listed on IDEAS

    1. R. Edwards & A. Parikh, 1976. "A Stochastic Policy Simulation of the World Coffee Economy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 58(2), pages 152-160.
    2. Kawai, Masahiro, 1983. "Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 435-459, June.
    3. Bray, Margaret M, 1981. "Futures Trading, Rational Expectations, and the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 49(3), pages 575-596, May.
    4. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-1387, September.
    5. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
    6. Alan H. Gelb, 1977. "Optimal Control and Stabilization Policy: An Application to the Coffee Economy," Review of Economic Studies, Oxford University Press, vol. 44(1), pages 95-109.
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    Cited by:

    1. Gardebroek, Cornelis & Oude Lansink, Alfons G.J.M., 2008. "Dynamic Microeconometric Approaches To Analysing Agricultural Policy," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6592, European Association of Agricultural Economists.
    2. Harris, James Michael & Blank, Steven C. & Erickson, Kenneth W. & Hallahan, Charles B., 2010. "Off-farm Income and Investments in Farm Assets: A Double Hurdle Approach," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61531, Agricultural and Applied Economics Association.
    3. Myyrä, Sami, & Pietola, Kyosti & Heikkilä, Anna-Maija, 2011. "Farm Level Capital: Capital positions, structures, the dynamics of farm level investments, capital accumulation and leverage positions," Factor Markets Working Papers 105, Centre for European Policy Studies.
    4. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.
    5. Wink Junior, Marcos Vinício & Sheng, Hsia Hua & Eid Junior, William, 2011. "Custos de transação: uma análise empírica da sua relação com investimento e investimento direto estrangeiro," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 51(2), March.
    6. Peter Howley & Emma Dillon, 2012. "Factors affecting the level of farm indebtedness: the role of farming attitudes," Working Papers 1201, Rural Economy and Development Programme,Teagasc.
    7. Lagerkvist, Carl Johan & Olson, Kent D., 2001. "Asymmetric Information, Capital Structure And Agricultural Investment," 2001 Annual meeting, August 5-8, Chicago, IL 20652, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers 122846, Factor Markets, Centre for European Policy Studies.
    9. Olsen, Jakob Vesterlund & Pederson, Michael Friis, 2011. "An Empirical Analysis of Access to Finance for Danish Farms: Understanding Investment and the Absence of Risk Management," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114591, European Association of Agricultural Economists.

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