Risk behaviour in the presence of government programs

Abstract

Our paper assesses the impacts of the 1996 US Farm Bill on production decisions. We apply the expected utility model to analyze farmers' behavior under risk and assess how farmers' production decisions change in the presence of government programs. Specifically, we empirically evaluate the relative price and the risk-related effects of farm policy changes at the intensive margin of production, as well as the extra value that these policies add to farmers’ certainty equivalent. We use farm-level data collected in Kansas to estimate the model. We find evidence that decoupled government programs have only negligible impacts on production decisions.