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A rational expectations approach to the modelling of agricultural supply: a case study of Iowa

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  • Tegene, Abebayehu

Abstract

A dynamic model for agricultural supply where expectation of exogenous variables is assumed to be formed rationally is developed. Farmers are assumed to make choices that maximize the expected present values of their incomes streams subject to dynamic and stochastic technology and their information. Their information is assumed to include the actual distributions of the exogenous variables which includes prices. Hence, farmers decision rules depend, among other things, on the stochastic processes of crop prices;The solution for the dynamic optimization problem gives a set of nonlinear simultaneous equations subject to within and cross equation restrictions. The restrictions are the implications of ration expectation hypothesis;The model is fitted to aggregate time series data on corn and soybean and other related variables from the state of Iowa. The results indicate that there is a dynamic interaction among land allocation, crop yields and crop prices. The restrictions imposed are supported by the data. The results also indicate that corn acreage is more responsive to government price support than to market price.

Suggested Citation

  • Tegene, Abebayehu, 1983. "A rational expectations approach to the modelling of agricultural supply: a case study of Iowa," ISU General Staff Papers 198301010800009963, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198301010800009963
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    References listed on IDEAS

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    Cited by:

    1. Fullerton, Thomas M., Jr., 1984. "Supply elasticities for U.S. fresh market vegetables: an application of duality theory within a quasi-rational expectations framework," ISU General Staff Papers 1984010108000017526, Iowa State University, Department of Economics.

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