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

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

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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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
Date of revision:
Handle: RePEc:ags:aaea02:19661
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  1. Sargent, Thomas J., 1980. ""Tobin's q" and the rate of investment in general equilibrium," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 107-154, January.
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  3. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
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  7. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
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  9. Daniel A. Sumner & James D. Leiby, 1987. "An Econometric Analysis of the Effects of Human Capital on Size and Growth among Dairy Farms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(2), pages 465-470.
  10. 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.
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