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Decoupled payments and agricultural output: a dynamic optimization model for a credit-constrained farming household

Monge-Arino, Francisco Antonio
http://rave.ohiolink.edu/etdc/view?acc_num=osu1181821956

Abstract Details

2007, Doctor of Philosophy, Ohio State University, Agricultural, Environmental and Development Economics.
Decoupled payments have emerged as an alternative to traditional agricultural subsidies, expected to reduce distorting impacts on international markets. However, when farmers face imperfections in key markets, even lump-sum payments may induce increases in agricultural output. This dissertation develops a deterministic dynamic optimization model for a representative credit-constrained corn farming household that receives a flow of lump-sum government payments. The interest rate charged on loans increases with the debt-to-asset ratio, due to the lender’s information and incentive problems. The model is parameterized with data from the ARMS database of the USDA. Econometric methods are used to estimate coefficients for the production function. Numerical methods are used to approximate a solution for the Bellman equation. Simulations with different values for the lump-sum transfer and other key parameters allow the identification of three potential effects of decoupled payments on agricultural output. First, the access to additional purchasing power provided by decoupled payments (liquidity effect) increases land holdings and output transitorily (along the optimal path) rather than permanently (in the steady state). Farmers achieve their optimum farm size sooner. Second, decoupled payments improve the farming households’ creditworthiness and allow the lender to classify them in a less-risky category. This is equivalent to an outward shift in the supply of credit and it reduces the cost of access to debt (creditworthiness effect), reinforcing the liquidity effect. This effect increases farm size and output permanently. Third, replication of the actions of the representative farming household by all will increase land prices that leads the representative corn farming household to reduce its holdings of land and output, both along the optimal path and in the steady state (land price effect). This somewhat mitigates the expansionary impact of the other two effects. The net effect of decoupled payments along these channels is an empirical issue that will depend on the balance among these effects. Further exploration of these issues is needed to determine the actual direction of the net impact of decoupled payments on agricultural output, international prices and the developing nations’ welfare. Decoupled payments still represent a correct first step toward more market-oriented agricultural policies.
Claudio Gonzalez-Vega (Advisor)
142 p.
Decoupled Payments; Liquidity Effect; Creditworthiness Effect; Land Price Effect; Dynamic Optimization Model; Credit Rationing; U.S. Agricultural Policy; WTO; Credit-constrained Farming Household; Green Box Policies

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Citations

  • Monge-Arino, F. A. (2007). Decoupled payments and agricultural output: a dynamic optimization model for a credit-constrained farming household [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1181821956

    APA Style (7th edition)

  • Monge-Arino, Francisco. Decoupled payments and agricultural output: a dynamic optimization model for a credit-constrained farming household. 2007. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1181821956.

    MLA Style (8th edition)

  • Monge-Arino, Francisco. "Decoupled payments and agricultural output: a dynamic optimization model for a credit-constrained farming household." Doctoral dissertation, Ohio State University, 2007. http://rave.ohiolink.edu/etdc/view?acc_num=osu1181821956

    Chicago Manual of Style (17th edition)

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This open access ETD is published by The Ohio State University and OhioLINK.