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Industry dynamics under production constraints — The case of the EU dairy sector

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

Abstract

In 2015 the EU terminated its milk quota regime that was part of the Common Agricultural Policy for three decades. Against this background our paper analyses how a tradable/non-tradable production quota influences firm entry and exit in the agricultural industry. To this end 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. Contrary to static models, we find that a quota system does not necessarily reduce the speed of adjustment within the industry since a tradable quota increases the liquidation value and provides an incentive for inefficient firms to cease production.

Suggested Citation

  • Kersting, Stefan & Hüttel, Silke & Odening, Martin, 2016. "Industry dynamics under production constraints — The case of the EU dairy sector," Economic Modelling, Elsevier, vol. 55(C), pages 135-151.
    • Handle: RePEc:eee:ecmode:v:55:y:2016:i:c:p:135-151
    DOI: 10.1016/j.econmod.2016.02.006
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    2. Guillaume Bagnarosa & Mark Cummins & Michael Dowling & Fearghal Kearney, 2022. "Commodity risk in European dairy firms," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 49(1), pages 151-181.
    3. Plogmann, Jana & Mußhoff, Oliver & Odening, Martin & Ritter, Matthias, 2022. "Farm growth and land concentration," Land Use Policy, Elsevier, vol. 115(C).
    4. Feil, Jan-Henning & Mußhoff, Oliver, 2016. "Analysing investment and disinvestment decisions under uncertainty, firm heterogeneity and tradable output permits," DARE Discussion Papers 1602, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    5. Lukáš Čechura & Zdeňka Žáková Kroupová & Irena Benešová, 2021. "Productivity and Efficiency in European Milk Production: Can We Observe the Effects of Abolishing Milk Quotas?," Agriculture, MDPI, vol. 11(9), pages 1-21, August.

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