Transaction Costs, Farm Finance and Investment

Catherine Benjamin and Euan Phimister

European Review of Agricultural Economics, 1997, vol. 24, issue 3-4, 453-66

Abstract: An investment model of the farm firm is constructed which allows for adjustment costs in investment and transactions costs associated with new borrowing. The presence of transaction costs means that the financial and investment decisions of the farm are simultaneous, and hence that financial decisions affect investment. In contrast to the work on liquidity constraints, the structure of the model generates a classification of farms which is observable in the data. This model is compared with a model that assumes perfect capital markets. Both models are estimated and tested using a balanced panel of 3,650 French farms over the period 1989-1993. The specification based on the perfect capital market assumption is rejected. The sample selection criterion implied by the transaction costs model allows the estimation of an empirically acceptable Euler equation for investment. Copyright 1997 by Oxford University Press.

Date: 1997
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