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The Acreage and Borrowing Effects of Direct Payments Under Uncertainty: A Simulation Approach

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  • Girante, Maria Joana
  • Goodwin, Barry K.

Abstract

We use simulation methods in an expected utility maximization framework to analyze a farmer’s optimal resource allocation in the presence of government payments, decoupled and not. This framework is extended to incorporate the optimal choice of investment levels in the presence of credit constraints. Further extensions include a wealth-dependent interest rate and decreasing marginal yields. We find decoupled payments affect the optimal choices of the credit-constrained farmer through a collateral-enhancement effect, so they do distort production. The 2005 proposal by Senators Grassley, Dorgan, Hagel, and Johnson to tighten limits on commodity payments is not found to affect payments of the typical Kansas farmer.

Suggested Citation

  • Girante, Maria Joana & Goodwin, Barry K., 2009. "The Acreage and Borrowing Effects of Direct Payments Under Uncertainty: A Simulation Approach," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49349, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea09:49349
    DOI: 10.22004/ag.econ.49349
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    References listed on IDEAS

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    1. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
    2. Charles A. Towe & Mitchell J. Morehart, 2009. "Credit Constraints: Their Existence, Determinants, and Implications for U.S. Farm and Nonfarm Sole Proprietorships," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 275-289.
    3. Barry K. Goodwin & Ashok K. Mishra, 2005. "Another Look at Decoupling: Additional Evidence on the Production Effects of Direct Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1200-1210.
    4. Vitor A. Ozaki & Sujit K. Ghosh & Barry K. Goodwin & Ricardo Shirota, 2008. "Spatio-Temporal Modeling of Agricultural Yield Data with an Application to Pricing Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(4), pages 951-961.
    5. Miller, J. Corey & Coble, Keith H. & Vergara, Oscar & Broyles, Meredith E., 2003. "Potential Impacts Of Changes To Government Payment Limits For Mississippi Farms," Research Reports 15797, Mississippi State University, Department of Agricultural Economics.
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