Journal Article

Asset fixity under state-contingent production uncertainty

Sansi Yang and C Richard Shumway

in European Review of Agricultural Economics

Volume 45, issue 5 Published in print December 2018 | ISSN: 0165-1587
Published online July 2018 | e-ISSN: 1464-3618 | DOI: https://dx.doi.org/10.1093/erae/jby016
Asset fixity under state-contingent production uncertainty

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  • Production and Organizations
  • Agricultural Economics

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Abstract

Asset fixity of inputs is tested under state-contingent production uncertainty. We construct a general dynamic dual model for U.S. agriculture that allows tests for full variability and strict fixity to be performed for each input as well as tests for functional form. We estimate the model using a generalised Box–Cox functional form. Most test results are robust to functional form, but test results of fixity are sensitive for two of four inputs. The generalised Leontief is found to be significantly preferred to the translog and normalised quadratic functional forms for the dynamic model. With this functional form, family labour exhibits strict fixity, while land, capital and hired labour exhibit quasi-fixity. The estimated adjustment rates for the three quasi-fixed inputs are 15, 27 and 47 per cent. Production uncertainty has limited impacts on aggregate investment decisions for quasi-fixed inputs. The insignificant elasticity between state-contingent outputs suggests that an ex post analysis conditional on the realised states of nature is appropriate.

Keywords: asset fixity; dynamic duality; production uncertainty

Journal Article.  11963 words.  Illustrated.

Subjects: Production and Organizations ; Agricultural Economics

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