A Rational Expectations Model of Agricultural Supply

Abstract

This work suggests a dynamic linear rational expectations modeling strategy for using time-series observations to study the impact of product prices on agricultural production and land allocation. The farmer's decision consists of specifying each period the portion of his land to be devoted to the growing of alternative crops. The dynamic element in the farmer's problem comes from the technology. A quadratic production technology is used. The farmer's optimal land allocation decision rules are derived as linear functions of past land allocations, expectations of future product prices, and other exogenous variables; and they can be interpreted as an optimal crop rotation. Assuming rational expectations and the exogeneity of prices for a small open economy, one obtains closed-form linear regression equations representing decision rules and stochastic processes. These are then estimated and tested using maximum likelihood methods and aggregate data from the Egyptian agriculture.

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