The Paradox of Risk Balancing: Do Risk-reducing Policies Lead to More Risk for Farmers?

Mei-luan Cheng and Brent A. Gloy

No 6546, 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: The study presents stochastic optimal control/dynamic programming (SOC/DP) to derive the optimal debt level and consumption in farm models concerning two sources of uncertainty: the return on assets and interest rate. The SOC/DP analytic framework is used to analyze the impacts of risk-reducing farm policies on farm’s financial and risk adjustments. The results show the violations of the risk-balancing concept, which theorizes that risk-reducing farm policies may lead to increases in financial leverage, total risk, and the expected returns. Also, this study examines the extent to which the estimates of the optimal debt level are biased when interest rate risk is ignored.

Keywords: Stochastic Optimal Control/Dynamic Programming; Financial Leverage; Uncertainty; Risk Balancing; Agricultural and Food Policy; Risk and Uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr
Date: 2008
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