Farm debt and the over-exploitation of natural capital

Graeme Guthrie

Resource and Energy Economics, 2024, vol. 77, issue C

Abstract: This paper uses a stochastic optimal control model to show how standard loan contracts create incentives for farmers to focus on short-term financial performance at the expense of farms’ long-term natural capital. These incentives are a manifestation of the debt overhang problem. Extending this model shows how sustainability-linked loans can be used to weaken these incentives in a way that potentially benefits farmers and their bankers. The magnitude of the economic benefits generated by these loans depends on farm characteristics. The paper investigates the optimal design of sustainability-linked loans.

Keywords: Debt overhang problem; Natural capital; Renewable resources; Stochastic optimal control; Sustainability-linked loans (search for similar items in EconPapers)
JEL-codes: D25 G31 G33 Q12 Q14 Q20 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:77:y:2024:i:c:s0928765524000150

DOI: 10.1016/j.reseneeco.2024.101439

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