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

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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 though a collateral - enhancement effect, so they do distort production. The 2005 proposal by Senators Grasseley, Dorgan, Hagel, and Johnson to tighten limits on commodity payments is not found to affect payments of the typical Kansas farmer.

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  • Maria Joana Girante & Barry K. Goodwin, 2009. "The Acreage and Borrowing Effects ok Direct Payments Under Uncertainty: A Simulation," NIPE Working Papers 14/2009, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:14/2009
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    File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2009/NIPE_WP_14_2009.pdf
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    References listed on IDEAS

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    1. Catherine Guirkinger & Stephen R. Boucher, 2008. "Credit constraints and productivity in Peruvian agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 39(3), pages 295-308, November.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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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    More about this item

    Keywords

    decoupled payments; credit constraints.;

    JEL classification:

    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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