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Structural change in agriculture under capacity constraints: An equilibrium approach

Stefan Kersting, Silke Hüttel () and Martin Odening ()

No 140, Thuenen-Series of Applied Economic Theory from University of Rostock, Institute of Economics

Abstract: This paper analyses the impact of a tradable production quota on firm entry and exit in the agricultural industry. 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 themselves. Contrary to many static models we find that introducing a quota system may foster structural change. A tradable quota increases the liquidation value and makes inefficient firms cease production despite higher output prices.

Keywords: dynamic stochastic equilibrium; production quota; firm entry and exit; dairy sector (search for similar items in EconPapers)
JEL-codes: D41 L11 Q11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr
Date: 2015
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