A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment
A stochastic dynamic programming model is used to compare the farmland investment impact of a fully decoupled direct payment and a standard price subsidy. The direct payment induces the farmer to invest because it lowers the farm's debt to asset ratio, which in turn reduces the probability of bankruptcy. The value of the real option to defer the investment decision is lower with a lower risk of bankruptcy, and thus the direct payment results in a higher probability of immediate investment. Simulation results demonstrate that for a farm facing moderate revenue and land price variability, the impact of a decoupled direct payment on farm investment is nearly as large as the investment impact of an equal-sized price subsidy. These results suggest that direct payments, such as those associated with U.S. production flexibility contracts, should be carefully scrutinized in on-going multilateral trade negotiations.
|Date of creation:||2003|
|Contact details of provider:|| Postal: 2053 Main Mall, Vancouver, BC V6T 1Z2|
Web page: http://www.landfood.ubc.ca/fre/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Hennessy, David A., 1998. "The Production Effects of Agricultural Income Support Policies Under Uncertainty," Staff General Research Papers Archive 1207, Iowa State University, Department of Economics.
- Vercammen, James, 2000. "Irreversible investment under uncertainty and the threat of bankruptcy," Economics Letters, Elsevier, vol. 66(3), pages 319-325, March.
- Milne, Alistair & Robertson, Donald, 1996. "Firm behaviour under the threat of liquidation," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1427-1449, August.
- Mary E. Burfisher & Sherman Robinson & Karen Thierfelder, 2000. "North American Farm Programs and the WTO," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 768-774.
- Allen M. Featherstone & Timothy G. Baker, 1987. "An Examination of Farm Sector Real Asset Dynamics: 1910–85," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 532-546.
- Holt, Richard W. P., 2003.
"Investment and dividends under irreversibility and financial constraints,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 27(3), pages 467-502, January.
- Richard W P Holt, 2000. "Investment and Dividends under Irreversibility and Financial Constraints," ESE Discussion Papers 55, Edinburgh School of Economics, University of Edinburgh.
- Barry Falk & Bong-Soo Lee, 1998. "Fads versus Fundamentals in Farmland Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 696-707.
- Benjamin, Dwayne, 1992. "Household Composition, Labor Markets, and Labor Demand: Testing for Separation in Agricultural Household Models," Econometrica, Econometric Society, vol. 60(2), pages 287-322, March.
- Oliver Mahul, 2000. "The Output Decision of a Risk-Neutral Producer under Risk of Liquidation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 49-58.
- J. Stephen Clark & Murray Fulton & John T. Scott, 1993. "The Inconsistency of Land Values, Land Rents, and Capitalization Formulas," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(1), pages 147-155.
- Falk, Barry L., 1991. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers Archive 11093, Iowa State University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:ags:ubcwps:15847. 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: (AgEcon Search)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.