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Farmer Behavior under Risk of Failure
Author(s) -
Foster William E.,
Rausser Gordon C.
Publication year - 1991
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1242712
Subject(s) - profit maximization , utility maximization , warrant , economics , cash crop , profit (economics) , marginal cost , market failure , cash , maximization , econometrics , production (economics) , microeconomics , financial economics , finance , mathematical economics
We analyze input decisions under risk of farm failure. Inputs with immediate cash outlays have greater effective than observed prices because their cost increases the probability of failure, and their optimal marginal products are higher than observed prices would warrant under strict profit maximizing without failure risk. An algebraic example illustrates the market equilibrium effects of failure risk. We apply the model to an analysis of Illinois corn production (1971–79). Results indicate that larger farms deviate less than smaller farms from strict profit maximization. Over the period studied, farmers moved further from setting marginal products equal to observed prices.