A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints

Nikolaj Malchow-Moeller and Bo Thorsen
Authors registered in the RePEc Author Service: Nikolaj Malchow-Møller

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A dynamic model of agricultural household behaviour in less developed countries in the presence of credit constraints and income uncertainty is developed. The production side of the model takes into account the irreversible and indivisible nature of non-stationary agricultural investment options, thereby combining the standard intertem- poral consumption model with features from the real option pricing literature. The model framework represents an interesting dynamic alternative to the static household models in the literature. It is shown that the model can be solved by use of dynamic programming routines, and numerical results are obtained for a variety of parameter values. Several interesting results emerge: First, the consumption policy functions of the agricultural household can become highly non-linear, violating the standard result that increased wealth implies increased consumption. This has implications for empirical estimation. Secondly, increasing uncertainty does not in general reduce the average propensity to consume, or increase the propensity to save. Thirdly, increased variation of income only to a limited extent carries through to variation in consumption. Fourthly, the effects of shocks to income depend crucially on the timing of shocks. And finally, reducing uncertainty does not reduce poverty significantly, whereas agricultural extension services and cash transfers are more likely to do so.

Keywords: agriculture; household model; credit constraints; uncertainty; irreversibility; indivisibility; dynamic programming. (search for similar items in EconPapers)
JEL-codes: C61 D1 D9 O12 O13 Q12 (search for similar items in EconPapers)
Pages: 64
New Economics Papers: this item is included in nep-agr
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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