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Compensating for Lower Household Income: The Case of U.S. Farm Households. Brian C. Briggeman Oklahoma State University Ken Foster Purdue University SAEA Annual Meetings 2006 Orlando, FL. Background. U.S. farm households are just as diverse as their farm (Mishra et al. 2002) - PowerPoint PPT Presentation
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Compensating for Lower Compensating for Lower Household Income: The Case Household Income: The Case
of U.S. Farm Householdsof U.S. Farm HouseholdsBrian C. BriggemanBrian C. Briggeman
Oklahoma State UniversityOklahoma State UniversityKen FosterKen Foster
Purdue UniversityPurdue University
SAEA Annual Meetings 2006SAEA Annual Meetings 2006Orlando, FLOrlando, FL
BackgroundBackground U.S. farm households are just as diverse as U.S. farm households are just as diverse as
their farm (Mishra et al. 2002)their farm (Mishra et al. 2002)
Mishra and Goodwin (1997) found that Mishra and Goodwin (1997) found that higher farm income variability increased higher farm income variability increased off farm labor supply for Kansas farmersoff farm labor supply for Kansas farmers
Rural Malawi household labor allocation is Rural Malawi household labor allocation is affected by individual access to credit affected by individual access to credit (Swaminathan and Findeis, 2003)(Swaminathan and Findeis, 2003)
Miranda seminar (2003)Miranda seminar (2003) Developed a Bellman theoretical frameworkDeveloped a Bellman theoretical framework How does borrowing and saving affect farmsHow does borrowing and saving affect farms Used ARMS dataUsed ARMS data
Working paper by Crook (2002)Working paper by Crook (2002) How do U.S. households fund excess How do U.S. households fund excess
expendituresexpenditures
Who cares and why?Who cares and why?
MotivationMotivation
ObjectiveObjective
How do U.S. farm households smooth How do U.S. farm households smooth consumption?consumption?
Policy ImplicationsPolicy Implications Targeted policy to U.S. farm households with Targeted policy to U.S. farm households with
limited optionslimited options
2001 ARMS Questionnaire2001 ARMS Questionnaire Was your household income below the Was your household income below the
amount from the previous year (2000)? If amount from the previous year (2000)? If yes, then proceed.yes, then proceed.
In what way did you compensate for In what way did you compensate for lower household income this year?lower household income this year?
Savings/InvestmentSavings/Investment Sell AssetsSell Assets BorrowBorrow Decrease SpendingDecrease Spending OtherOther
Dependent Dependent VariableVariable
Data and MethodologyData and Methodology 2001 ARMS Data2001 ARMS Data
Family FarmsFamily Farms 1,163 total respondents1,163 total respondents
Interested in choice to compensate for Interested in choice to compensate for lower incomelower income
Conditional Multinomial LogitConditional Multinomial Logit
m
l il
ijthth
X
Xji
1'
'
exp
expincome)lower |choice selects hhld Prob(
Probability of choosing “alternative Probability of choosing “alternative compensation method” relative to compensation method” relative to decreased spending as a function of:decreased spending as a function of:
Farm AssetsFarm Assets
Non-Farm AssetsNon-Farm Assets
Off Farm Income ShareOff Farm Income Share Off Farm Income Relative to Minimum ConsumptionOff Farm Income Relative to Minimum Consumption
Interest RateInterest Rate
CONTINUED…CONTINUED…
Probability of choosing “alternative Probability of choosing “alternative compensation method” relative to compensation method” relative to decreased spending as a function of:decreased spending as a function of: Depreciation as a Percent of Total ExpensesDepreciation as a Percent of Total Expenses
Profitable Farm InvestmentProfitable Farm Investment ROA > 3% (CD Rate)ROA > 3% (CD Rate)
Subsidized AgricultureSubsidized Agriculture Received an AMTA paymentReceived an AMTA payment
RetirementRetirement Operator age > 65Operator age > 65
Lower Income because of Farm LossLower Income because of Farm Loss
Descriptive Statistics and Descriptive Statistics and Expected SignExpected Sign
Variable Mean Std. Dev.Savings/
InvestmentSell
Assets Borrow OtherDecreased Spending
Farm Assets $553,316 $316,570 ? + + ? +
Non-Farm Assets $118,292 $56,633 + ? ? + ?
Off Farm Income Share 1.46 0.44 + ? - / + + ?
Interest Rate 4.38% 2.70% + + - ? +
Depreciation Rate 16.35% 10.77% ? ? ? ? +
Expected Sign on Choice
*Expected sign on choice is for marginal effects *Expected sign on choice is for marginal effects
Descriptive Statistics and Descriptive Statistics and Expected SignExpected Sign
*Expected sign on choice is for marginal effects *Expected sign on choice is for marginal effects
Variable MeanSavings/
InvestmentSell
Assets Borrow OtherDecreased Spending
Profitable Farm Investment 0.27 + - ? ? ?
Subsidized Agriculture 0.33 ? - ? ? ?
Retirement 0.19 + + - ? ?Lower Income b/c of
Farm Loss 0.42 + ? - / + ? +
Expected Sign on Choice
ResultsResults
*Orange and yellow represent 5% and 10% statistical significance *Orange and yellow represent 5% and 10% statistical significance respectivelyrespectively Standard errors calculated for coefficients Standard errors calculated for coefficients
VariableSavings/
InvestmentSell
Assets Borrow OtherDecreased Spending
Farm Assets -0.07% 0.08% 0.23% -0.47% 0.23%
Non-Farm Assets 2.83% 0.37% -1.49% -0.02% -1.69%
Off Farm Income Share -0.03% 0.37% -5.57% 2.10% 3.13%
Interest Rate 0.21% 0.13% 1.22% 0.77% -2.33%
Depreciation Rate 4.47% 1.99% -24.84% -16.43% 34.82%
Marginal Effects
ResultsResults
*Orange and yellow represent 5% and 10% statistical significance *Orange and yellow represent 5% and 10% statistical significance respectivelyrespectively Standard errors calculated for coefficients Standard errors calculated for coefficients
VariableSavings/
Investment Sell Assets Borrow OtherDecreased Spending
Profitable Farm Investment -8.51% 4.97% -1.56% -1.30% 6.39%
Subsidized Agriculture -7.20% -6.14% 3.45% -5.14% 15.03%
Retirement 9.40% 4.78% -16.22% 0.49% 1.55%Lower Income b/c of
Farm Loss 9.79% -3.89% 4.82% -8.00% -2.73%
Marginal Effects
0 $200,000 $400,000 $600,000 $800,000
0.0
0.2
0.4
0.6
0.8
1.0
Non-Farm Assets
Pre
dict
ed p
roba
bilit
yDec SpendSav/InvSell AsstBorrowOther
Predicted probability graphPredicted probability graph(Change in Non-Farm Assets)(Change in Non-Farm Assets)
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
Depreciation Rate
Pre
dict
ed p
roba
bilit
yDec SpendSav/InvSell AsstBorrowOther
Predicted probability graphPredicted probability graph(Change in Depreciation Rate)(Change in Depreciation Rate)
0 1 2 3 4 5
0.0
0.2
0.4
0.6
0.8
1.0
Off Farm Income Share
Pre
dict
ed p
roba
bilit
yDec SpendSav/InvSell AsstBorrowOther
Predicted probability graphPredicted probability graph(Change in Off Farm Income Share)(Change in Off Farm Income Share)
Implications of ResultsImplications of Results Targeted policy to farm households with Targeted policy to farm households with
limited optionslimited options Off farm employment, credit availability, Off farm employment, credit availability,
savings behaviorsavings behavior
Better customer profile for lendersBetter customer profile for lenders
Demand for capital goodsDemand for capital goods
Questions?Questions?
Further ResearchFurther Research Credit ReserveCredit Reserve
Unconditional Multinomial LogitUnconditional Multinomial Logit Probit with the Mills RatioProbit with the Mills Ratio
Diagne and Zellner (2001) two step Diagne and Zellner (2001) two step approach controlling for choice-based approach controlling for choice-based samplingsampling Swaminathan and Findeis (2003) adopted this Swaminathan and Findeis (2003) adopted this
approachapproach
Additional ResearchAdditional Research U.S. farm household typologyU.S. farm household typology
Refine U.S. farm household Refine U.S. farm household consumption smoothingconsumption smoothing
Dynamics of U.S. farm household Dynamics of U.S. farm household behaviorbehavior ““Pseudo Panel” based on typologyPseudo Panel” based on typology DSP framework on saving/borrowing DSP framework on saving/borrowing
behaviorbehavior
Theoretical Model under Differing Theoretical Model under Differing RatesRates
C2
C1
C 1
V
U
U
’
2C
I1
W
1
A
A
2
I
I’
X
(Y + A
Z
X
Y
’
Y
1 1)1
) 2
Theoretical Model under Differing Theoretical Model under Differing RatesRates
Y1
Theoretical Model under Differing Theoretical Model under Differing RatesRates
Y1
X’
X (Y1 + A1)
Y
Y’ C2
C1
U’
U E1(Y2)
C2
Z
A2
C1 A1
D
Theoretical Model under Differing Theoretical Model under Differing RatesRates
C2
C1
C 1
V
U
U
’
2C
I1
W
1
A
A
2
Y
Y’
X
(Y + A
Z
X
E
Y
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(Y
1 1)1
) 1 2