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Investment, credit constraints and public policy in a neoclassical adjustment cost framework
[Investitionen, Kreditrationierung und Agrarpolitik in einem dynamischen neoklassischen Modell mit Anpassungskosten]

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  • Čechu­ra, Lukas
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    This paper deals with the analysis of the impact of credit rationing on the farmer's economic equilibrium and the analysis of different policy scenarios in a derived neoclassical adjustment cost framework. The theoretical model is an optimal dynamic investment model, in which the upper bound on investment is introduced. The limit of the investment enables to analyse the consequence of the occurrence of credit rationing on farmer's capital accumulation, investment and supply. The method of optimal control is used to solve the optimization problem. The results show that the occurrence of credit rationing may significantly determine a farmer's economic equilibrium. Then the analysis of defined policy scenarios suggests that a loan guarantee efficiently solves the problem of the occurrence of external credit rationing. Interest rate subsidy may produce overinvestment and, thus, increases the probability of occurrence of the crowdingout effect, especially in the group of non-credit constraint farmers. Moreover, as far as the cost of agricultural policy is concerned, other agricultural support tools are less effective. The numerical application shows that the farmer's economic equilibrium is mostly sensitive to the initial bound on investment, the parameter of the cost function, the price, the level of technology and the discount rate. Finally, if the uncertainty is introduced, then the level of investment spending and capital accumulation is lower.

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    Paper provided by Leibniz Institute of Agricultural Development in Transition Economies (IAMO) in its series IAMO Discussion Papers with number 115.

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    Date of creation: 2008
    Handle: RePEc:zbw:iamodp:115
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    1. von Kalckreuth, Ulf, 2004. "Financial constraints for investors and the speed of adaptation: Are innovators special?," Discussion Paper Series 1: Economic Studies 2004,20, Deutsche Bundesbank, Research Centre.
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