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A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment

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  • Vercammen, James

Abstract

A stochastic dynamic programming model is used to compare the farmland investment impact of a fully decoupled direct payment and a standard price subsidy. The direct payment induces the farmer to invest because it lowers the farm's debt to asset ratio, which in turn reduces the probability of bankruptcy. The value of the real option to defer the investment decision is lower with a lower risk of bankruptcy, and thus the direct payment results in a higher probability of immediate investment. Simulation results demonstrate that for a farm facing moderate revenue and land price variability, the impact of a decoupled direct payment on farm investment is nearly as large as the investment impact of an equal-sized price subsidy. These results suggest that direct payments, such as those associated with U.S. production flexibility contracts, should be carefully scrutinized in on-going multilateral trade negotiations.

Suggested Citation

  • Vercammen, James, 2003. "A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment," Working Papers 15847, University of British Columbia, Food and Resource Economics.
    • Handle: RePEc:ags:ubcwps:15847
    DOI: 10.22004/ag.econ.15847
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    Cited by:

    1. Heikkinen, T. & Pietola, K., 2009. "Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture," European Journal of Operational Research, Elsevier, vol. 192(2), pages 634-646, January.
    2. Marconi, V. & Raggi, M. & Viaggi, D. & Lefebvre, M. & Gomez y Paloma, Sergio, 2015. "The impact of the 2013 Common Agricultural Policy reform on farmer's investment decisions: an ex-ante evaluation," 2015 Conference, August 9-14, 2015, Milan, Italy 212225, International Association of Agricultural Economists.
    3. Frederic Courleux & Herve Guyomard & Fabrice Levert, 2007. "Étude prospective sur le fonctionnement des marchés des droits au paiement et de la réserve nationale mis en place dans le cadre de la réforme de la PAC de juin 2003," Working Papers hal-01595356, HAL.
    4. Baffes, John & De Gorter, Harry, 2005. "Disciplining agricultural support through decoupling," Policy Research Working Paper Series 3533, The World Bank.

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