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Structural change in agriculture under capacity constraints: An equilibrium approach

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  • Kersting, Stefan
  • Hüttel, Silke
  • Odening, Martin

Abstract

This paper analyses the impact of a tradable production quota on firm entry and exit in the agricultural industry. We develop a dynamic stochastic equilibrium framework considering that a release of production capacity by exiting firms affects the investment options for entrants. Firms' investment and exit decisions depend on future output and quota prices, which in turn will be affected by the evolution of industry structures themselves. Contrary to many static models we find that introducing a quota system may foster structural change. A tradable quota increases the liquidation value and makes inefficient firms cease production despite higher output prices.

Suggested Citation

  • Kersting, Stefan & Hüttel, Silke & Odening, Martin, 2015. "Structural change in agriculture under capacity constraints: An equilibrium approach," Thuenen-Series of Applied Economic Theory 140, University of Rostock, Institute of Economics.
    • Handle: RePEc:zbw:roswps:140
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    More about this item

    Keywords

    dynamic stochastic equilibrium; production quota; firm entry and exit; dairy sector;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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