Farm Debt, Default, and Foreclosure: An Economic Rationale for Policy Action

Abstract

Abstract Economic analysis of farm programs typically focusses on economic costs. Here we show that, because of market failures and imperfections, there are possible economic benefits to be derived from programs which reduce or eliminate the threat of default and foreclosure. A production model of an indebted firm is developed and serves as a basis for an aggregate model which identifies possible costs and benefits from a program of transfers to indebted farmers. The challenge facing policy makers is to design programs which capture the benefits of reducing the probability of default while minimizing perverse incentive effects of such programs.

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