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• W1505257113 abstract "This article reviews various models that may be used to explain optimal lever- age choice for the proprietary farmer in a stochastic dynamic environment and develops a new model that highlights the risk of failure rather than the usual concept of risk as the variability of wealth. The model suggests that in addition to the usual factors, farm financial leverage is affected by age, wealth, and the opportunity cost of farming. Farmers often make substantial changes in financial leverage over time. A frequently observed pattern is for a young farmer to start out heavily in debt, and pay down the debt over time, if the farm is successful. Young farmers who are unsuccessful seek alter- native employment in the agribusiness sector, or join the rural-to-urban migration move- ment. Given constant parameters for risk aversion and the underlying probability distri- bution, systematic planned changes in leverage over time are not consistent with existing static models of farm leverage choice (such as Barry, Baker, and Sanint 1980, 1981; and Collins). In addition, many existing models of dynamic leverage choice either fail to explain this behavior, or are based on unattractive assumptions. A popular explanation for these leverage changes is that young farmers are willing to take chances while older farmers are more conservative.' Even though changing risk aversion could explain changing lifetime leverage choices, there is little evidence that farmers become more risk averse with age. 2 An alternative explanation is that leverage choice is a dynamic process. This could mean that even if risk aversion or the parameters of the relevant density function did not change, a farmer could plan to change leverage over time. This article introduces a stochastic optimal control model of farm leverage choice that models failure risk rather than the typical concept of variability of wealth. An analytic solution is presented that gives qualitative results on how optimal leverage changes over time and in response to changing wealth and the changing opportunity cost of being a farmer. The first section discusses previous dynamic stochastic models of proprietary leverage. The second section develops an alternative model of farm leverage choice that considers the farmer's risk of bankruptcy. The text discusses the assumptions and impli- cations of the models, with most technical material left to appendices. The final section summarizes and states the primary testable implications of the model. The model suggests, in addition to the usual factors that affect the costs and benefits of leverage, that wealth, the opportunity cost of farming, and age also affect optimal leverage choice." @default.
• W1505257113 created "2016-06-24" @default.
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• W1505257113 date "1993-12-08" @default.
• W1505257113 modified "2023-09-24" @default.
• W1505257113 title "Lifetime Leverage Choice for Proprietary Farmers in a Dynamic Stochastic Environment" @default.
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• W1505257113 doi "https://doi.org/10.22004/ag.econ.30962" @default.
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