IDEAS home Printed from https://ideas.repec.org/p/aah/aarhec/2000-7.html
   My bibliography  Save this paper

A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints

Author

Listed:
  • Nikolaj Malchow-Moeller
  • Bo Jellesmark Thorsen

    () (Department of Economics, University of Aarhus, Denmark)

Abstract

A dynamic model of agricultural household behaviour in less developed countries in the presence of credit constraints and income uncertainty is developed. The production side of the model takes into account the irreversible and indivisible nature of non-stationary agricultural investment options, thereby combining the standard intertem- poral consumption model with features from the real option pricing literature. The model framework represents an interesting dynamic alternative to the static household models in the literature. It is shown that the model can be solved by use of dynamic programming routines, and numerical results are obtained for a variety of parameter values. Several interesting results emerge: First, the consumption policy functions of the agricultural household can become highly non-linear, violating the standard result that increased wealth implies increased consumption. This has implications for empirical estimation. Secondly, increasing uncertainty does not in general reduce the average propensity to consume, or increase the propensity to save. Thirdly, increased variation of income only to a limited extent carries through to variation in consumption. Fourthly, the effects of shocks to income depend crucially on the timing of shocks. And finally, reducing uncertainty does not reduce poverty significantly, whereas agricultural extension services and cash transfers are more likely to do so.

Suggested Citation

  • Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, "undated". "A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints," Economics Working Papers 2000-7, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2000-7
    as

    Download full text from publisher

    File URL: ftp://ftp.econ.au.dk/afn/wp/00/wp00_7.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    2. Haim Mendelson & Yakov Amihud, 1982. "Optimal Consumption Policy under Uncertain Income," Management Science, INFORMS, vol. 28(6), pages 683-697, June.
    3. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
    4. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
    5. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
    6. Elliott, Graham & Jansson, Michael, 2003. "Testing for unit roots with stationary covariates," Journal of Econometrics, Elsevier, vol. 115(1), pages 75-89, July.
    7. Miller, Bruce L, 1974. "Optimal Consumption with a Stochastic Income Stream," Econometrica, Econometric Society, vol. 42(2), pages 253-266, March.
    8. Niels Haldrup & Peter Lildholdt, 2005. "Local power functions of tests for double unit roots," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 159-179.
    9. Licun Xue, "undated". "A Notion of Consistent Rationalizability - Between Weak and Pearce's Extensive Form Rationalizability," Economics Working Papers 2000-4, Department of Economics and Business Economics, Aarhus University.
    10. Jamsheed Shorish, "undated". "Quasi-Static Macroeconomic Systems," Economics Working Papers 2000-3, Department of Economics and Business Economics, Aarhus University.
    11. Jansson, Michael, 2002. "Consistent Covariance Matrix Estimation For Linear Processes," Econometric Theory, Cambridge University Press, vol. 18(06), pages 1449-1459, December.
    12. Serven, Luis, 1997. "Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 229-268, Supplemen.
    13. Licun Xue, 2000. "Negotiation-proof Nash equilibrium," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(3), pages 339-357.
    14. Lusardi, Annamaria, 1998. "On the Importance of the Precautionary Saving Motive," American Economic Review, American Economic Association, vol. 88(2), pages 449-453, May.
    15. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-194, April.
    16. Gersovitz, Mark, 1988. "Saving and development," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 10, pages 381-424 Elsevier.
    17. Niels Haldrup & Peter Lildholdt, "undated". "On the Robustness of Unit Root Tests in the Presence of Double Unit Roots," Economics Working Papers 2000-1, Department of Economics and Business Economics, Aarhus University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Harounan Kazianga & William A. Masters, 2006. "Property rights, production technology, and deforestation: cocoa in Cameroon," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 19-26, July.
    2. Kazianga, Harounan & Masters, William A., 2002. "Property Rights, Production Technology And Deforestation: Cocoa In West Africa," 2002 Annual meeting, July 28-31, Long Beach, CA 19871, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, "undated". "Investment under Uncertainty - the Case of Repeated Investment Options," Economics Working Papers 2000-15, Department of Economics and Business Economics, Aarhus University.

    More about this item

    Keywords

    agriculture; household model; credit constraints; uncertainty; irreversibility; indivisibility; dynamic programming.;

    JEL classification:

    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • D1 - Microeconomics - - Household Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aah:aarhec:2000-7. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.econ.au.dk/afn/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.