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|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.landfood.ubc.ca/fre/
More information through EDIRC
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.:
- 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.
- 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.
- Vercammen, James, 2000. "Irreversible investment under uncertainty and the threat of bankruptcy," Economics Letters, Elsevier, vol. 66(3), pages 319-325, March.
- Hennessy, David A., 1998.
"The Production Effects of Agricultural Income Support Policies Under Uncertainty,"
Staff General Research Papers
1207, Iowa State University, Department of Economics.
- 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.
- Richard Holt, 2004.
"Investment and Dividends under Irreversibility and Financial Constraints,"
ESE Discussion Papers
55, Edinburgh School of Economics, University of Edinburgh.
- 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.
- 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.
- Falk, Barry L., 1991. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers 11093, Iowa State University, Department of Economics.
- 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.
- 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.
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 references are entirely missing, you can add them using this form.