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o rK m
g
Internal Net Worth and the Investment
Process: An Application to U.S.
Agriculture
R. Glenn Hubbard and Anil K. Kashyap
r a p e r
3
b e r ie s
Working Papers Series
Issues in Macroeconomics
Research Department
Federal Reserve Bank of Chicago
D e c e m b e r 1991 (WP-91-27)
|
lllii
FEDERAL RESERVE B A N K
OF CHICAGO
INTERNAL NET WORTH AND THE INVESTMENT PROCESS:
AN APPLICATION TO U.S. AGRICULTURE
by
R. Glenn Hubbard
Columbia University and the National Bureau of Economic Research
Anil K Kashyap
University of Chicago
Forthcoming Journal of Political Economy
ABSTRACT
Recent models of firm investment decisions stressing informational
imperfections in capital markets provide a foundation for interpreting
evidence that movements in internal finance can predict investment
spending, even after controlling for measures of firms' investment
opportunities. While such evidence is suggestive, it is often open to
other interpretations.
We examine these models using data on equipment investment in the
U.S. agricultural sector. This sector is particularly interesting
because it has experienced large fluctuations in net worth and the
profitability of investment, and reasonable measures of net worth can be
constructed. Our findings provide support for a class of "internal
funds" models of investment under asymmetric information.
I.
Introduction
A. Background
That financing and investment decisions are not in general indepen
dent has been recognized in applied discussions of the investment
process for some time (see for example Eckstein and Sinai, 1986).
Indeed, the potential role of internal finance in the investment
process, holding constant investment opportunities, was stressed in
early empirical investment models (notably in Meyer and Kuh, 1957).
However, dissatisfaction with the theoretical underpinnings of these
models led the profession to search for more completely specified
optimizing models.
By the late 1960s, the neoclassical^ model (and its
adaptations) had become the accepted framework for analyzing investment.
2
Subsequently, the q theory has also served as a benchmark for
discussing investment.
In these models, internal and external funds are
generally treated symmetrically, as if they are perfect substitutes,
except possibly for tax considerations.
While both of these approaches
are elegant in their derivation, they have enjoyed only limited
empirical success.
In fact, perhaps the most forceful criticism of
these models has been that they are often outperformed by simple ad hoc
accelerator models that assert a central role for internal funds.^
Recent research on the effects of asymmetric information in capital
4
markets has made it possible to reinterpret the accelerator mechanism.
This reinterpretation is possible because, in many models in which
asymmetric information is important, costs of external finance vary
inversely with the level of "inside finance."
Thus there is a direct
channel for internal funds to affect investment:
When borrowers' net
worth improves, lenders becoming more willing to lend, and additional
investment can be financed.
A second implication of these models is
that at sufficiently high levels of net worth, incentive problems should
be less important.
This paper shows that for U.S. agricultural
equipment investment, this approach does appear to be relevant, and
2
these implications are borne out by the data.
Recent empirical studies have tried to test directly the
predictions of models of capital market frictions arising from
asymmetric information by exploiting cross-sectional heterogeneity in
micro data.
That is, the strategy has been to isolate a priori groups
of firms as plausibly "constrained," and test whether their investment
behavior rejects a symmetric-information null model, while the
investment behavior of the complement does not .
5
Fazzari, Hubbard, and
Petersen (1988) and Hoshi, Kashyap, and Scharfstein (1991) have
performed such tests for U.S. and Japanese firms, respectively, using
the g-theory model of investment.
6
These studies attempt to control for investment opportunities by
incorporating marginal g, the increase in firm value from an increment
to the capital stock.
By specifying a functional form for costs of
adjustment, one can solve for an investment function, relating the rate
of investment to q (see for example Hayashi, 1982; and Summers, 1981).
A stumbling block in this approach is that the empirical proxy for
marginal g, average g, may be a poor proxy, because of imperfect
competition in the product market, non-constant returns to scale in
production, or capital-market frictions.
7
With respect to capital-market frictions, the principal problems
with this strategy are two.
First, the g model is a questionable
framework for analysis under the asymmetric-information alternative, as
expectations reflected in prices quoted on centralized securities
markets will not in general reflect insiders' valuations of future
investment projects.
Both Fazzari, Hubbard, and Petersen and Hoshi,
Kashyap, and Scharfstein include g as a reduced-form control for
investment opportunities (so that an internal funds variable does not
proxy for expected future profits).
However, the possibility remains
that g is a poor proxy for investment opportunities.
There is also a
measurement problem: Cash flow is an imperfect proxy for the insiders'
net worth variable stressed by the theories.
3
Second, augmenting the g-theory approach may be instructive in
highlighting the importance of cross-sectional heterogeneity, but such
revisions do not provide a test of an alternative structural model of
internal finance and investment.
Instead, the results reject a null
hypothesis of perfect capital markets for some firms which might
plausibly be credit constrained.
Recent studies by Bond and Meghir
(1990) , Whited (1991), Gilchrist (1990), Hubbard, Kashyap, and Whited
(1991) , and Himmelberg (1990) make use of an Euler equation approach to
testing the cross-sectional heterogeneity stressed by Fazzari, Hubbard,
and Petersen (1988).
We depart from the g approach, and instead make use of the firm's
Euler equation to model the investment decision (see for example Abel,
1980).
Our Euler equation incorporates the possibility that borrowing
constraints may be important: In particular, when internal net worth is
"high," the usual Euler equation should hold across adjacent periods.
Alternatively, with a significant decline in net worth, investment will
also depend on collateralizable wealth, holding constant investment
opportunities.
This approach is in the spirit of the g-theory tests we
described previously, but corrects two deficiencies.
By not relying on
the "investment function" representation (i.e., that using g explicitly
to control for investment opportunities), we avoid problems of measuring
marginal g which can complicate the interpretation of other (i.e.,
"internal funds") regressors.
Second, by allowing the effect of net
worth on investment to vary systematically, we are able to model
directly its role in the investment process, so that links between
internal finance and investment are less subject to alternative
interpretations.
B. Agriculture as a Case Study
We selected the agricultural industry as most appropriate for our
approach for a number of reasons.
First, internal worth has
traditionally been identified as being an important determinant of the
availability of agricultural finance, particularly during agricultural
credit crises.
For instance, Tostlebe (1957) notes the historical
importance of internal finance in agricultural investment finance,
especially in periods of contraction.
Stock (1984) concludes that the
problem of heavy debt-service burdens in periods of low farm prices and
the associated risks of foreclosure figured significantly in movements
of agrarian unrest prior to World War I.
Alston (1983), writing about
the interwar period in the U.S., emphasizes the interaction of low
collateral values and restrictions on credit in accounting for the very
high farm foreclosure rates during the period.
Calomiris, Hubbard, and
Stock (1986) discuss the role of financial factors in amplifying the
farm debt crisis of the 1980s.
In addition, the agricultural sector is a natural one in which to
test information-based models of the effects of internal net worth on
investment in particular.
First, most models are cast in terms of an
entrepreneur or small number of insiders negotiating with outsiders for
financing.
While this is an accurate characterization of the financing
of agricultural investment, it is a less appropriate description for
most large firms for which data are available.
Moreover, investment in
8
agriculture is "information intensive”; monitoring of projects (and
treatment of the land) and returns is difficult.
9
A second reason for investigating agricultural investment is that
it generally requires considerable upfront financing.
There is a
lengthy period between the purchase of input and the sale of
agricultural output, and short-run variable costs are a small portion of
total costs relative to the typical manufacturing industry.
The
volatility of the value of net worth (as measured by farm land values)
and of profitability is high; we return to this point later.
A third advantage of studying this sector is that movements of the
central variable of interest, insiders' net worth, can be identified.
Both proprietors' equity and the value of farm land, the two most likely
forms of collateral, are observable.
In contrast, for most other types
of firms, insiders' net worth is difficult to quantify.
For instance, a
5
corporation's internal funds are not equivalent to insiders' stakes,
although this proxy has been employed by almost all past researchers,
including ourselves, in testing these theories.
A problem in most other
applications is that measuring future collateralizable net worth is
difficult.
A related point is that our data for the U.S. agricultural sector
encompass episodes in which "debt deflations" have reduced farmers' net
worth.
This is important:
The most appropriate experiment here is a
change in internal net worth unaccompanied by a change in investment
opportunities.
Most existing studies have considered movements in
proxies for inside finance
(e.g., cash flow) which may be correlated
with shifts in investment opportunities. This problem is compounded when
controls for investment opportunities (e.g., Tobin's q) are imperfect.
9
Some of our tests shed light on the effects on investment of "debt
deflation" episodes described by Fisher (1933), Kindleberger (1973), and
others.
Such episodes occurred for agricultural prices in the early
1920s, 1930s, and again in 1980s, and each was exacerbated by coincident
declines in land values.
The paper is organized as follows.
In section II, we derive an
investment model based on the Euler equation corresponding to farmers'
intertemporal optimization problem for capital accumulation.
In the
presence of finance constraints during periods of low net worth, the
Euler equation contains additional terms involving measures of internal
net worth.
We outline a set of tests designed to exploit predictions of
this framework for differences in the appropriate specification of
investment models in "falling net worth" and "rising net worth" periods.
Our empirical tests are reported in section III, using a data set we
constructed for the U.S. agricultural sector over the period from 1914
to 1987.
The results are consistent with an important role of internal
net worth in agricultural investment decisions in periods during which
net worth declined significantly.
In other periods, the standard
neoclassical specification is not rejected by the data.
concludes.
Section IV
6
II.
Modeling the Investment Decision
A. Extending the Neoclassical Specification
Farmers maximize the present discounted value (V) of net cash flows
( II)
from investment, where
vo - Eo
and
(1)
z
t=l
is the discount factor at time t (i.e., the inverse of one plus
the appropriate discount rate )
. 10
The maximization takes place subject
to the following constraints:
Capital Accumulation:
= (l-5)Kt
+ 1^, where I and K represent
investment and the end-of-period capital stock, respectively, and where
5 is the rate of depreciation (assumed constant).
Net Cash Flow:
Net cash flow II is the residual after taxes, payments to
variable factors, investment (and adjustment costs), and debt service.
Finance is composed of internal equity and debt; no external equity is
permitted.
11
Let:
K = stock of capital
I = Gross investment in capital
N = vector of variable factors of production
w = vector of variable factor prices
L = land
£ = rental rate on land
B = value of net debt outstanding (one-period loans)
i = interest rate on loans
p = agricultural price
p 1 = effective price of capital goods at time t (incorporating tax
considerations)
7
F(K
t— 1
A( ,
,L
,N ) = revenue function (F' > 0, F" < 0)
t"l t
K
K
1 ^)
= costs of adjusting the capital stock.
Then/
(2)
nt ■ W i ' V i ' V
- V . - Vt-1 - "".'Vi'
- i
B
+ B - B
- pXI
t- 1 t- 1
t
t- 1
Pt t
To restrict internal equity contributions to retained earnings, It >
0
.
Also, all prices and values are expressed relative to the general price
deflator.
12
Transversalitv Condition;
So that a farming enterprise cannot borrow an
infinite amount to distribute, we require that
T-1
lim [H ft] B =
T-*» t=0
1
0
,
V .
^
Let X and <p represent the multipliers associated with the capital
accumulation constraint and the non-negative dividend constraint
respectively.
The first-order conditions for the revised optimization
problem with respect to I, K, and B are given by1 3
<l+q>t)(-Al(Kt.I,It)-p,,)+Xt - 0,
(3)
E,< (1+<P,.|)£,( (Pm F k,)-Ak (K./Im )
= 0/
(4)
and
<l+*> - E^d+^J/B.d+i,)) =0.
It is convenient to define
(5)
= l/(l+i,).
To obtain an equation for investment, it is necessary to
parameterize the adjustment cost function A.
We follow the approach
taken in the g-theory literature, and let14
A <Kt-l'It> = (ao<(It/Kt-l> " V) + («1 /2)((It/Kt_1) - JipJKt-jy (6 )
where n is the average (normal) investment rate .
AIt =
a 0
+ “i ^ t ^ t - l " ^>' and
15
Now,
(7)
8
A K t - - - - - (a1/2)( I t + l / Kt > 2 ~ ^ < a 0 - a ^ / 2 ) .
(8)
The recent tradition in this literature is to use equation (7) in
conjunction with equation (3) and an assumption about the equality of
marginal and average q, to obtain an estimating equation.
Instead of
following this route, we eliminate the shadow value of capital from the
equation and work with the dynamic equation for investment.
substituting for X^ and X
Thus,
using equations (3 ) and (4 ) yields
E,(A{P1 .1 FK,-Ak (K„I1.1)+(1-6)
“
'„,]})
—
(9)
= o.
Substituting (7) and (8 ) into (9) yields
P,.|FKi+ (( a
, / 2
)(I,.1 /Kt)2+p (a0 -a,p/2 )]
+
(1
)
0
+ptl,)} )
- a0 - a,(It/K,.,-p) - p,1 = 0.
We assume that expectations are rational, and allow for an expectational error
17
, where E,(tj1.1)=0 and E,(rjf.,) = a* Hence,
Pi-|Fki+
1
(ai/2 )(It.|/K,)2 +7 J(a0 -a,p/2 )]
(1
1
)
+ (1-6) (a0 +a1 (I,.l/Kl-p)+p,I
.1] )
- Oo - at, (
—A*) - p,' = 17,»,•
The model in (11) is a nonlinear equation in I/K, which can be estimat
ed to identify a^.
We incorporate financial factors by adding a constraint on the use
of external finance by farmers.
In particular, we assume that the
outstanding debt, B, must be less than an debt ceiling B".
The ceiling,
while possibly unobservable to the econometrician, depends on measures
9
of collateralizable net worth.
That is, movements in the value of
farmers' net worth will affect farmers' ability to finance investment,
holding constant actual investment opportunities.
If we let e be the
Lagrange multiplier associated with the constraint that B £ B% we can
rewrite the first-order condition in (5) as
(l+<pt) - E^Ped-MP**!) (l+ie)) - o t = 0.
(5')
It is convenient to normalize o>t relative to (1 + <pt) and denote the
resulting ratio by <5t
Thus when <ot is non-zero,
. 16
Pt = (l-c5t) [(l+<pc)/ (1+<PC+1)]/ (l +it) .
We can now rewrite equation (11)
as:
0,(1 -
P,.,FK, + [(ai/2) (I,,,/Kt)2+p(a0-a,p/2) ]
(12)
+ (1-5) (a0 + a,(It.,/Kt - p) + p,l,] }
- a0 - a, (
)
- p,‘ = 7 jt., ,
or
P,..Fk, + ((a1 /2)(It.,/K,)J+M(a0 -a1 ^/2)]
(12')
+ (1-5) (a0 + a,(1,.,/K, - p) + ptl,1 >
- «o - «|(I./K«-|~P) ~ Pt1 =
i7,-i +
P,-ifk. + ((«i/2) (1,.,/K,):+f/(a0-a,^/2) ]
+ (1-5) (a0 + a, (1,.,/K, - #i) + p,L,] ) •
During periods in which collateralizable net worth is low and the credit
constraint is binding,
expression in (1
2
g>
> 0 , and the error term contains the additional
').
This approach in general underestimates the importance of financial
constraints on the investment process.
That is, merely satisfying the
Euler equation between adjacent periods does not mean that investment
corresponds to that predicted by the null "perfect capital markets"
model.
There is in principle a set of financial constraints for all.
future periods.
Hence, the Euler equation for investment does not hold
for current adjacent periods if, conditional on all future constraints,
the contemporaneous constraint is binding.
It will nonetheless be the
case that, even if the current constraint is not binding, farmers may
accumulate financial resources against the possibility of binding future
constraints,
17
Our intent is not to simulate long-run under-investment
because of "precautionary saving" by firms, but rather to study the
effects of shocks to net worth on the timing of investment.
B.
18
Problems for Econometric Estimation
Three issues arise in the estimation of (12').
First, because the
model is nonlinear in I/K (the dependent variable in the linear regres
sion model in the q framework), estimation by nonlinear least squares is
required.
Second, there is an obvious simultaneity problem because of
the presence of the expected marginal product of capital F in the
K
model. The instrumental variables used are reported in the tables
outlining our estimation results in Section IIIC.
Generally, we used
current and/or once-lagged values of key prices: the lagged value of the
ex ante real interest rate (described in Section IIIA), and current and
lagged values of the log of the relative price of land, and the taxcorrected relative price of equipment investment goods.
Additional
instrumental variables include: (i) a single lag of I/K, (I/K)2, and the
ratio of farm profits to capital; (ii) the change in real agricultural
exports scaled by capital (as a demand shifter); and (iii) proxies for
shifts in farmers' net worth (the change in the ratio of farmers' equity
to assets and the change in the rate of real capital gains on debt); and
(iv) the change in real lending by the Farmers Home Administration
normalized by K, and the change in real government payments to farmers
(normalized by K).
Some of the instruments were first differenced to
induce the stationarity required in the use of generalized method of
11
moments estimation.
Land prices are an important instrumental variable to permit
evaluation of competing hypotheses.
Movements in land prices (in
response to shifts in current and expected future agricultural prices)
affect not only the value of land as a part of farmers' net worth, but
also the expected profitability of agricultural investment.
The land
price variable allows for the role of expectations of movements in
commodity prices.
Hence, when we examine the effects of movements in
internal net worth on capital spending, we are holding constant the
impact of the associated price effects of those movements on investment
opportunities.
Finally, the estimation strategy must reflect the fact that the
appropriate model depends on whether the financing constraint is
binding.
We consider three approaches here.
After estimating the basic
model without credit constraints (i.e., equation (1
1
)), we estimate (1
2
)
over a restricted sample including only periods in which, a priori,
ci> = 0.
Second, we parameterize u as a function of an observable proxy
for internal net worth, including interaction terms in (1
1
) where
appropriate; the estimated coefficients on those interaction terms
should be zero under the symmetric-information null hypothesis.
Finally, we investigate an implication of some models of the role of
internal net worth in the investment decision that holding constant
investment opportunities, net worth effects on investment are more
pronounced in "bust" periods than in "boom” periods.
We discuss these
approaches in more detail in section III, after reviewing sources of
data for the variables in the model.
III. Data and Estimation
A. Construction and Data Sources
Before presenting our econometric evidence, we describe briefly the
data we used in the estimation.
Details of the data construction are
contained in the Appendix; we summarize the principal points below.
Proceeding term by term through equation (11), the capital stock series
12
is
c a l c u l a t e d u s in g t h e p e r p e t u a l in v e n t o r y m ethod.
d e p r e c i a t i o n r a t e u se d i n t h e c a l c u l a t i o n
w it h e s t im a t e s
W ykoff
fo r t r a c t o r s
is
The g e o m e tr ic
0 . 12 , w h ic h i s c o n s i s t e n t
and a g r i c u l t u r a l m a c h in e ry in H u lte n and
( 1981).19
The in v e s t m e n t s e r i e s t h a t we u se d i n
fo rm in g t h e c a p i t a l s t o c k i s
t h e s e r i e s on a g r i c u l t u r a l eq u ipm en t p r o v id e d by t h e B u re a u o f E co n o m ic
A n a l y s i s o f t h e U .S .
Commerce D e p a rtm e n t.
Eq u ip m en t c a p i t a l i s
im p o rta n t f a c t o r o f p r o d u c t io n t h a t h a s t r a d i t i o n a l l y
o f t h e in v e s t m e n t in t h e a g r i c u l t u r a l s e c t o r .20
c o n s i s t e n t tim e s e r i e s
f o r in v e s t m e n t in
is
a v a ila b le
s t r u c t u r e s .21
an
a c c o u n te d f o r much
In a d d it io n ,
a lo n g
f o r t h i s t y p e o f in v e s t m e n t ,
and n o t
S in c e t h e d a t a a r e a v a i l a b l e b a c k t o
1910, s e v e r a l im p o rta n t p r e - w a r a g r i c u l t u r a l c r e d i t c r i s e s a r e in c lu d e d
in t h e s a m p le s .
The com ponents o f eq u ip m en t in v e s tm e n t c o n s i s t o f t r a c t o r s ,
a g r i c u l t u r a l m a c h in e ry e x c e p t t r a c t o r s ,
a u t o m o b ile s ,
tru ck s,
H ow ever, t r a c t o r s ,
t r a ile r s
m e ta l w o rk in g m a c h in e r y ,
b u s e s and t r u c k t r a i l e r s
a g r i c u l t u r a l m a c h in e r y ,
and o t h e r e q u ip m e n t.
and t r u c k s ,
a r e t h e do m inan t com ponents o f t h e s e r i e s ,
b u ses,
and t r u c k
a c c o u n t in g f o r o v e r
80 p e r c e n t o f t h e in v e s t m e n t in m ost y e a r s .
In th e e m p ir ic a l t e s t s d is c u s s e d
v e r s i o n s o f e q u a t io n s
is
in t e r e s t
case,
r a t e ca n be i n f e r r e d
f o r t h e e x ante r e a l
f o r farm lo a n s
is
III
C , we w i l l e s t im a t e
I n t h e fo rm e r c a s e ,
a p a ra m e te r t o be e s t im a t e d ,
f o r /}
( i.e .,
in t e r e s t r a t e ) .
d e s c r ib e d
f o r th e e x p e cte d i n f l a t i o n
and t h e
i n t h e A p p e n d ix .
ra te
s u g g e s t e d by G ordon and V e i t c h
t h e d is c o u n t
(c o n sta n t)
from t h e e s t im a t e o f $ .
we m ust c o n s t r u c t a s e r i e s
s e r ie s
s e c t io n
( 11 ) and ( 12 ) w it h a c o n s t a n t d is c o u n t f a c t o r jS
o r a t im e - v a r y in g d is c o u n t f a c t o r .
fa cto r
in
e x ante r e a l
In th e l a t t e r
b a se d on a c o n s t r u c t e d
The n o m in a l i n t e r e s t r a t e
We c o n s t r u c t a t i m e - s e r i e s
i n t h e GNP d e f l a t o r u s in g t h e p ro c e d u r e
( 1986 ) .
We u s e a s e r i e s on t h e a v e ra g e p ro d u c t o f c a p i t a l t o p ro x y f o r t h e
m a r g in a l p ro d u c t o f c a p i t a l .
when t h e t e c h n o lo g y i s
The two v a r i a b l e s w i l l be p r o p o r t io n a l
C o b b -D o u g la s and f a c t o r s a r e p a id c o m p e t i t i v e l y .
13
Our a p p r o x im a t io n t o t h i s
a v e ra g e p ro d u c t i s
g r o s s incom e l e s s paym ents
to v a r ia b le
fa cto rs.
T h is m easu re a l s o
co u rse .
o u tp u t i s
C o b b -D o u g las in c a p i t a l ,
If
fa cto rs),
and la n d ,
in c l u d e s r e t u r n s t o la n d ,
of
" la b o r ” ( v a r ia b le
t h e c o e f f i c i e n t we e s t im a t e ca n be tr a n s fo rm e d t o an
e s t im a t e o f t h e c a p i t a l s h a r e .22
The l a s t v a r i a b l e
g o o d s,
is
i n t h e e q u a t io n , t h e r e l a t i v e
m u l t i p l i e d by a t a x c o r r e c t i o n
p r i c e o f in v e stm e n t
f a c t o r t h a t r e c o g n iz e s th e
b e n e f i t s o f t h e in v e s t m e n t t a x c r e d i t and t h e t a x s h i e l d s a r i s i n g
d e p r e c ia t io n e x p e n se s.
None o f o u r su b se q u e n t r e s u l t s
is
from
n o t ic e a b l y
a f f e c t e d by w h e th e r o r n o t we make t h e t a x a d ju s t m e n t .
I n t h e A p p e n d ix , we d e s c r ib e o u r s o u r c e s f o r t h e v a r i a b l e s we u se
a s in s t r u m e n t s o r a s p r o x ie s f o r c r e d i t w o r t h i n e s s .
in c l u d e m e a su re s o f la n d p r i c e s ,
e x p o rts,
B.
in t e r e s t
rate s,
eq u ip m en t
e q u it y and a s s e t v a l u e s ,
a g r ic u lt u r a l
and governm ent s u b s i d i e s .
Summary S t a t i s t i c s ;
F ig u r e
T h e se v a r i a b l e s
In v e s tm e n t and Net W orth
1 p l o t s t h e r a t i o o f eq u ipm en t in v e s tm e n t t o t h e s t o c k o f
( a t t h e b e g in n in g o f t h e y e a r ) .
a g r ic u lt u r a l
The f i g u r e d e m o n s tra te s t h a t
in v e s t m e n t was q u it e v o l a t i l e
d u r in g o u r sa m p le p e r io d .
M a jo r f l u c t u a t i o n s h av e ta k e n p la c e aro un d b o th W orld W a rs,
D e p r e s s io n ,
and d u r in g t h e 1980s .
th a t d e s p it e th e s e
in v e s t m e n t r a t e
p e r io d s .
la r g e
The f i r s t
colum n in T a b le 1 shows
f l u c t u a t i o n s t h e mean and v a r ia n c e o f th e
a r e q u it e s i m i l a r d u r in g th e p r e - w a r and p o s t - w a r
In each c a s e ,
t h e a v e ra g e r a t e
and t h e s t a n d a r d d e v i a t i o n
The n e x t two f i g u r e s
is
The to p p o r t io n o f t h i s
illu s t r a t e
f ig u r e
is
b etw een 14 and 15 p e r c e n t
a p p r o x im a t e ly 5 p e r c e n t .
p r o x ie s f o r o f n e t w o rth .
shows t h e e v o lu t io n o f t h e p r i c e o f la n d
(r e la t iv e
shows t h a t t h e r e l a t i v e
ch an g e o f more th a n 60 p e r c e n t o v e r t h e p a s t d e c a d e .
h ig h lig h t s t h is
v o la t ilit y
p e r c e n t a g e ch a n g e i n t h e r e l a t i v e
F ig u r e 2
t o t h e GNP d e f l a t o r ) .
moved o v e r a w id e ra n g e d u r in g t h e p a s t s e v e n t y y e a r s ,
o f th e f ig u r e
d u r in g th e
p r i c e o f la n d h a s
i n c l u d in g a
The bottom p o r t io n
by g r a p h in g t h e a n n u a l
p r ic e .
F ig u r e 3 show s movements in t h e r a t i o
o f farm e q u it y t o
farm
14
c a p it a l
( a t t h e b e g in n in g o f t h e y e a r ) .
th e la r g e
A s w it h t h e la n d p r i c e
s e r ie s ,
f l u c t u a t i o n s a r e q u it e common; o v e r t h e l a s t t e n y e a r s o f t h e
s a m p le , t h e r a t i o
r e c o v e r in g
in
d e c li n e d by o v e r 30 p e r c e n t b e f o r e p a r t i a l l y
1986 and 1987 .
Movements i n t h e v a lu e o f n e t w o rth ca n be u se d t o i d e n t i f y p e r io d s
i n w h ic h f a r m e r s '
lo w .
The s e r i e s
s ig n if ic a n t ly
in d ic a t e
c r e d it w o r t h in e s s i s
lik e ly
t o be p a r t i c u l a r l y
h ig h o r
s u g g e s t two e p is o d e s w here n e t w o rth d e c li n e d
i n t h e p e r io d p r i o r t o W orld War I I .
la r g e d e c l i n e s
F i r s t , a l l m e a su re s
f o llo w in g t h e 1920-21 d e f l a t i o n .
c o l l a p s e o c c u r r e d a t t h e o n s e t o f t h e D e p r e s s io n ,
A se co n d m a jo r
b etw een 1930 and 1933,
a lt h o u g h t h e l e v e l o f n e t w o rth re m a in e d low f o r some tim e t h e r e a f t e r .
S ta n d a r d a c c o u n t s o f t h i s p e r io d ,
f o r in s t a n c e T o s t le b e
( 1957 ) ,
c o r r o b o r a t e t h e v ie w t h a t t h e s e two e p is o d e s w ere q u i t e s e v e r e .
e m p i r i c a l w ork we w i l l c o n s id e r t h e s u g g e s t io n by K in d le b e r g e r
and o t h e r s t h a t t h e e n t i r e
re g im e w h ere f a r m e r s '
( 1973 )
1921-33 p e r io d s h o u ld be t r e a t e d a s a s i n g l e
n e t w o rth was u n u s u a lly
F o llo w in g W orld War I I ,
d i s c u s s e d by C a l o m i r i s ,
In our
lo w .
t h e s i t u a t i o n was much b e t t e r .
H ubb ard,
and S t o c k
( 1986 ) ,
As
t h e p e r io d b etw een
1955 and 1979 was one w it h o u t any m a jo r d e c l i n e s i n a g r i c u l t u r a l
com m odity p r i c e s o r f a r m e r s '
n e t w o rth .
In d e e d ,
t h e com m odity and la n d
p r i c e boom o f t h e s e v e n t i e s s u g g e s t t h a t c r e d i t w o r t h i n e s s was e s p e c i a l l y
h ig h o v e r t h e l a s t
p a r t ic u la r ly
e a r ly
1980s .
few y e a r s o f t h i s p e r io d .
w h ile t h e
it
a g r i c u l t u r e was
h a rd h i t d u r in g t h e g e n e r a l m acro eco n o m ic d e c l i n e
As t h e two f i g u r e s s u g g e s t ,
e p is o d e w h ere i n s i d e r s '
b a la n c e ,
H ow ever,
s t a k e s w ere l i k e l y
in th e
t h e 1981-86 p e r io d w as a n o th e r
t o h a v e been v e r y lo w .
On
a p p e a r s t h a t t h e 1921-33 and 1981-86 p e r io d s w ere " b u s t s "
1955-79 p e r io d was a "boom" p e r io d .
T h e s e im p r e s s io n s a r e c o n fir m e d by t h e lo w e r two row s o f T a b le 1 .
The a v e r a g e a n n u a l d e c l i n e
in th e r e l a t i v e
n e t - w o r t h y e a r s was 5.13 p e r c e n t ;
r a t io ,
T h ese y e a r s a ls o
in v e s t m e n t d a t a .
i n te rm s o f t h e e q u i t y - t o - a s s e t s
t h e d i f f e r e n c e was a l s o e v id e n t ,
v o la t ilit y .
The g r o s s
p r i c e o f la n d o v e r t h e lo w -
p a r t ic u la r ly
i n te rm s o f
s t a n d o u t i n t h e a g r i c u l t u r a l eq u ip m en t
in v e s tm e n t r a t e a v e ra g e d o n ly 11 p e r c e n t p e r
15
y e a r d u r in g t h e s e e p is o d e s , so t h a t n e t in v e s tm e n t w ould t y p i c a l l y
have
been n e g a t iv e .
A s t r ik in g
c o n t r a s t em erges when t h e s e y e a r s a r e com pared t o th e
p e r io d b etw een t h e K o re a n War and t h e se co n d o i l
th e t a b le ,
t h e a v e ra g e i n c r e a s e
sh o ck.
in t h e two m e a su re s o f f a r m e r s '
w o rth o v e r t h e s e y e a r s was 3.31 and 0.37 p e r c e n t ,
a ls o t h a t th e v o l a t i l i t y
p e r io d .
q u it e
U .S .
o f b o th m e a su re s i s
net
r e s p e c t iv e ly .
N o tic e
c o n s id e r a b ly lo w e r i n t h i s
In v e s t m e n t betw een t h e m id d le 1950s and l a t e
ste a d y ,
As r e p o r t e d in
1970s was a ls o
r e i n f o r c i n g t h e v ie w t h a t t h i s was a h e a lt h y p e r io d f o r
a g r ic u lt u r e .
C.
E s t im a t io n
We p u rs u e s e v e r a l t e s t s w it h a common u n d e r ly in g s t r a t e g y .
if
th e sta n d a rd
fa cto rs
is
( n u ll)
co rre ct,
model w h ich d o es n o t in c l u d e a r o l e
th e n t h e o v e r i d e n t i f y i n g r e s t r i c t i o n s
w it h t h e m odel s h o u ld n o t be r e j e c t e d by th e d a t a .
a l t e r n a t i v e model i s
co rre ct,
so t h a t o> i s
F u rth e rm o re ,
in c a s e s
m odel ca n be r e j e c t e d ,
fo r f in a n c ia l
a s s o c ia t e d
C o n v e rs e ly ,
n o n ze ro on a v e r a g e ,
n u l l model s h o u ld f a i l t h e t e s t o f o v e r i d e n t i f y i n g
f o r w h ic h th e r e s t r i c t i o n s
N am ely,
if
th e
th e n th e
r e s t r ic t io n s .
im p lie d by t h e n u l l
o u r a l t e r n a t i v e model s u g g e s t s m o d i f ic a t io n s
w h ic h s h o u ld h e lp o v e r t u r n t h e r e j e c t i o n s .
As a s t a r t i n g
p o in t we e s t im a t e e q u a tio n
under p e r f e c t c a p it a l m a rk e ts,
lo n g e s t p e r io d
( 11 ) ,
t h e E u l e r e q u a t io n
f o r th e p e r io d b etw een 1914 and 1987, th e
f o r w h ich c o n s i s t e n t d a ta s e r i e s
a re a v a ila b le .
o f w hat f o llo w s we o m it t h e p e r io d s u r r o u n d in g W orld War I I
T h e r e a r e s e v e r a l r e a s o n s f o r t h e o m is s io n .
in c e n t iv e s
th a t
f a c in g
lik e ly
fa rm e rs:
(i)
V e itc h ,
c o n t r o ls
d i s r u p t e d p r o d u c t io n i n c e n t i v e s ;
m a rk e t in g a g re e m e n ts o v e r t h i s
r e s t r ic t io n s
p r ic e
p e r io d .
F ir s t ,
In a l l
( 1940- 1947) .
two f a c t o r s changed
f o r a g r i c u l t u r a l p ro d u cts
and ( i i )
Second,
ch a n g e s i n
t h e r e w ere q u a n t i t a t i v e
on in v e s t m e n t goods d u r in g t h e p e r io d
( s e e G ordon and
1986 ) .
As mentioned in the previous section, the number of parameters to
be e s t im a t e d d ep en d s upon w h e th e r we t r e a t t h e d is c o u n t f a c t o r a s
16
c o n s t a n t o r t im e - v a r y in g .
a p p ro ach e s.
T h e re a r e l o g i c a l a rg u m en ts f o r b o th
On t h e one h an d ,
a r e a s o n a b le and o fte n -m a d e a ssu m p tio n i s
t h a t t h e ex ante r e a l i n t e r e s t r a t e
a llo w s u s t o s i d e s t e p d i f f i c u l t
in t e r e s t ra te
s e r ie s ,
is s u e s
co n sta n t.
T h i s a ssu m p tio n a l s o
in v o lv e d i n c o n s t r u c t i n g a r e a l
i s s u e s compounded i n t h e a l t e r n a t i v e m odel i n
w h ic h a sy m m e tric in f o r m a t io n i s
d is c o u n t f a c t o r i s
is
im p o r t a n t .
In t h i s
a p a ra m e te r t o be e s t im a t e d .
f ir s t
stra te g y ,
th e
On t h e o t h e r h an d , t h e
a ssu m p tio n o f a c o n s t a n t d is c o u n t f a c t o r n e c e s s a r i l y means t h a t any
s h if t s
in
ex ante r e a l i n t e r e s t r a t e s w i l l
m is s p e c if ic a t io n .
in t e r e s t ra te
T h u s,
s e r ie s ,
in d u c e m odel
d e s p it e t h e d i f f i c u l t i e s
in c o n s t r u c t in g a r e a l
t h e r e a r e r e a s o n a b le d o u b ts a b o u t an y r e s u l t s
w h ic h c a n n o t be c o n fir m e d when d a t a a r e u se d i n c o n s t r u c t i n g t h e
d is c o u n t
fa cto r.
a p p ro a ch e s,
d is c o u n t
R a t h e r th a n ad o p t a s i n g l e
stra te g y ,
we p u rs u e b o th
a lt h o u g h we w i l l e m p h a siz e t h e r e s u l t s w it h a t im e - v a r y in g
fa cto r,
s i n c e a priori t h i s
a p p ro a ch le a n s m ost f a v o r a b ly
to w a rd a c c e p t in g t h e n u l l m o d e l.
I n a d d it io n t o t h e d is c o u n t f a c t o r ,
w h ic h m ust be e s t im a t e d :
eq u ip m e n t c a p i t a l
(a t r a n s f o r m a t io n o f )
in o u t p u t ,
In s p e c i f i c a t i o n s
t im e - v a r y in g ,
is
d is c o u n t
th e r e la t iv e
sh are of
t h e a d ju s t m e n t - c o s t c o e f f i c i e n t
t h e c o n s t a n t te r m .
th e re
t h e r e a r e o t h e r p a r a m e te r s
(ax) and
i n w h ich t h e d is c o u n t f a c t o r i s
an a d d i t i o n a l c o e f f i c i e n t a t t a c h e d t o t h e
f a c t o r w h ich m ust be e s t im a t e d .
Both t h i s
p a ra m e te r and t h e
c o n s t a n t te rm a r e n o n lin e a r c o m b in a tio n s o f p a r a m e te rs w h ic h c a n n o t be
i d e n t i f i e d .23
The f i r s t
( 11 ) .
two co lu m n s o f T a b le 2 p r e s e n t e s t im a t e s f o r e q u a t io n
In th e f i r s t
co lu m n , we r e p o r t t h e e s t im a t e s u n d e r t h e a ssu m p tio n
t h a t t h e d is c o u n t f a c t o r
is
co n sta n t.
e s t im a t e o f t h e r e a l i n t e r e s t r a t e
p e rce n t.
p r o d u c t io n
in
is
C o b b -D o u g la s
a ro u n d 0 . 04 .
( s e e f o o t n o t e 21 ) ,
l i n e w it h e s t im a t e s r e p o r t e d i n T o s t le b e
and M undlak and H e llin g h a u s e n
case,
fa c e d by f a r m e r s i s
The im p lie d s h a r e p a ra m e te r i s
f u n c t io n
In t h i s
( 1982 ) .
( 1957 ) ,
our im p lic it
a p p r o x im a t e ly 1
A ssu m in g t h a t t h e
t h is
e s t im a t e
G r ilic h e s
( 1963 ) ,
is
17
The a d ju s tm e n t c o s t p a ra m e te r i s
th a n u n i t y
(a b o u t 1 . 05 ) .
t y p i c a l q m odel t y p i c a l l y
T h is e s t im a t e i s
c a p it a l
is
v e r y e n c o u ra g in g s i n c e th e
o f t h i s e s t im a t e i s
v a lu e o f q t h a t i s
a d ju s tm e n t p a r a m e t e r .
la r g e r
le a d s t o e s t im a t e s t h a t a r e im p la u s ib ly la r g e .
One way t o a s s e s s t h e p l a u s i b i l i t y
i n f e r t h e e q u ilib r i u m
e s t im a t e d t o be s l i g h t l y
t o u se i t
c o n s i s t e n t w it h t h i s
to
s iz e d
S in c e t h e r a t e o f d e p r e c i a t i o n o f eq uipm ent
assum ed t o be 12 p e r c e n t ,
a q u a d r a t ic a d ju s tm e n t p a ra m e te r o f
1.05 i m p lie s an e q u ilib r i u m v a lu e o f q o f 1 . 13.24
I n t h e se co n d co lu m n , we r e p o r t t h e e s t im a t e s u n d e r t h e a ssu m p tio n
t h a t t h e d is c o u n t f a c t o r i s
co n stru cte d r e a l
t im e - v a r y in g
in t e r e s t ra te
s e r ie s ).
common p a r a m e t e r s ,
a, and th e s h a r e ,
w it h s p e c i f i c a t i o n
in w h ich £
s p e c if ic a t io n s ,
is
(th a t i s ,
it
v a r i e s w it h th e
The e s t im a t e s f o r t h e two
a r e q u it e s i m i l a r t o t h o s e found
co n sta n t.
H ow ever, u n d e r b o th
t h e m o d e l's o v e r i d e n t i f y i n g r e s t r i c t i o n s
ab o u t t h e 1 p e r c e n t s i g n i f i c a n c e
w ork i n v e s t i g a t e s w h e th e r t h i s
le v e l.
a re r e je c t e d
at
The r e m a in d e r o f t h e e m p i r i c a l
r e je c t io n
is
a t t r ib u t a b le to f in a n c ia l
fa cto rs.
Our f i r s t
r e s p o n s ib le
se t of te s ts
fo r th e se r e je c t io n s .
n e t w o rth and in v e s t m e n t ,
t h e n e t w o rth v a r i a b l e
r e s u lt
2.
from t h i s
p ro x y i s
To e x p lo r e t h e l i n k b etw een s h i f t s
we r e - e s t im a t e d e q u a t io n
( 11 ) ,
th e o v e r id e n t if y in g r e s t r i c t i o n s
e v id e n c e t h a t s h i f t s
n o t r e j e c t e d when we o m it t h e n e t w o rth
in t h e r e a l
f o r t h e m o d e l's r e j e c t i o n ,
e x p e r im e n t ,
i n t e r e s t r a t e per se a r e n ot
ev en thou g h r e a l r a t e s may have
b u t d ro p p in g in s t e a d th e la n d p r i c e
in s t r u m e n t s p r o x y in g f o r s h i f t s
e x p o rts,
go vern m en t p a y m e n ts,
v a r ia b le s )
in demand o r incom e
T h u s,
th e r e s id u a ls
R e p e a tin g
in s t r u m e n t o r o t h e r
(th e a g r ic u lt u r a l
o r F a rm e rs Home A d m in is t r a t io n
d id n o t r e v e r s e t h e r e j e c t i o n
r e s t r ic t io n s .
The
a r e no lo n g e r
b een h ig h d u r in g p e r io d s i n w h ich i n t e r n a l n e t w o rth was lo w .
t h is
in
b u t e x c lu d e d
from t h e s e t o f in s t r u m e n t a l v a r i a b l e s .
T h a t t h e m odel i s
r e s p o n s ib le
i n n e t w o rth a r e
e x p e rim e n t a r e shown i n th e n e x t two co lum n s o f T a b le
I n b o th c a s e s ,
r e je c t e d .
e x a m in e s w h e th e r s h i f t s
le n d in g
o f th e o v e r id e n t if y in g
from t h e n u l l m odel a r e s i g n i f i c a n t l y
18
p r e d i c t a b l e on t h e b a s i s o f p a s t movements i n net worth w h ile t h e r e i s
lit t le
p r e d ic t a b ilit y
c o n t a in e d i n c u r r e n t o r p a s t movements i n
p r ic e s p er s e .
We v ie w t h i s
f lu c t u a t io n s
fa rm e rs'
in
in v e s t m e n t p r o c e s s /
la n d
e v id e n c e a s h i g h ly s u g g e s t iv e t h a t
n e t w o rth p la y an im p o rta n t r o l e
e v en a f t e r c o n t r o l l i n g
fo r s h if t s
in
in th e
in v e s tm e n t
o p p o r t u n it ie s .
T u r n in g t o t h e d e t a i l s o f t h e e s t im a t e s w h ic h e x c lu d e t h e n e t w o rth
in s t r u m e n t /
th e r e s u lt s
f o r t h e t im e - v a r y in g d is c o u n t f a c t o r m odel a r e
more p l a u s i b l e th a n t h e e s t im a t e s from t h e m odel w it h a c o n s t a n t
d is c o u n t f a c t o r .
One d i f f e r e n c e b etw een t h e two s e t s o f e s t im a t e s i s
t h a t t h e t im e - v a r y in g - d is c o u n t f a c t o r s p e c i f i c a t i o n
lo w e r e s t im a t e
is
f o r t h e a d ju s t m e n t - c o s t p a r a m e t e r .
p ro d u c e s a s l i g h t l y
A se co n d d i f f e r e n c e
t h a t t h e c o n s t a n t d i s c o u n t - f a c t o r m odel i m p lie s a r e a l i n t e r e s t r a t e
w h ic h i s
n e g a t iv e /
from z e r o .
a llo w in g
a lt h o u g h n o t s t a t i s t i c a l l y
in t e r e s t ra te s/
on t h e s p e c i f i c a t i o n
We n e x t a tte m p t t o
h a v e b een r e s p o n s i b l e
te st
d if f e r e n t
F o r s i m p l i c i t y o f e x p o s it io n and g iv e n t h e im p o rta n c e o f
fo r s h if t in g
d is c u s s io n
s ig n if ic a n t ly
in t h i s
is o la t e
we f o c u s t h e re m a in d e r o f o u r
w it h a t im e - v a r y in g d is c o u n t f a c t o r .25
t h e p e r io d s when s h i f t s
i n n e t w o rth may
f o r b reakd ow n s i n t h e s t a n d a r d m o d e l.
r e s p e c t f o c u s e s on w h e th e r t h e a b i l i t y
m odel t o e x p l a i n t h e d a t a i s
a lt e r e d
We e s t im a t e d t h e m odel i n e q u a t io n
The f i r s t
o f t h e in v e s tm e n t
i n p e r io d s o f d e c l i n i n g n e t w o rth .
( 11 ) o v e r t h e sa m p le p e r io d e x c lu d in g
1921-33 and 1981- 86 . The r e s u l t s from t h e e s t im a t io n a r e shown i n t h e
f ir s t
colum n o f T a b le 3 .
t e s t o f o v e r id e n t if y in g
p ara m e te r i s
The s t a n d a r d m odel now m a r g in a lly p a s s e s t h e
r e s t r ic t io n s .
somewhat lo w e r th a n b e f o r e ,
e s t im a t e d s h a r e p a ra m e te r re m a in s i s
S im ila r r e s u lt s
1980s .
is
p la u s ib le .
The
s i m i l a r t o t h o s e i n T a b le 2 .
su g g est th a t th e r e je c t io n s
1930s ,
and
i n T a b le 2 may be
t o t h e s u s t a in e d p e r io d s o f low n e t w o rth a s m ig h t be
e x p e c t e d w it h t h e c r e d i t
v ie w .
but s t i l l
a r e o b t a in e d in one o m its a l l o f t h e 1920s ,
T h ese f in d in g
a t t r ib u t a b le
The e s t im a t e d a d ju s tm e n t c o s t
c o n s t r a i n t u n d e r t h e a s y m m e t r ic - in f o r m a t io n
19
To p u rs u e t h i s
id e a more f o r m a l ly , we ad o p t a more p a r a m e t r ic
a p p ro a ch t o s t u d y in g t h e e f f e c t s o f movements i n
in v e s t m e n t s p e n d in g ,
h o ld in g c o n s t a n t in v e s tm e n t o p p o r t u n i t i e s .
f o r t h e s e p e r io d s o f p e r s i s t e n t l y
i n t e r n a l n e t w o rth ,
a*,
t o depend n e g a t i v e l y on ch a n g e s 26
so t h a t
- Y * t\
w here y < 0 .
n e t w o rth
(
H ere we u se t h e f i r s t
(a ss e ts
le s s
lia b ilit ie s )
d iffe r e n c e s
r e la t iv e
is
13 )
in t h e v a lu e o f f a r m e r s '
t o b e g in n in g - o f - p e r io d
a s s e t s a s a p ro x y f o r t h e i n t e r n a l n e t w o rth m e a s u r e .27,28
th e m u lt ip lie r
Thus
low n e t w o rth , we a llo w u , t h e
m u l t i p l i e r on t h e b o rro w in g c o n s t r a i n t ,
in
i n t e r n a l n e t w o rth on
a lw a y s n o n n e g a t iv e , we s e t a* t o z e r o
To e n s u r e t h a t
i n y e a r s when
n e t w o rth i n c r e a s e d .29
The r e s u l t s
th is
r e p o r t e d in t h e se co n d colum n o f T a b le 3 in c o r p o r a t e
g e n e r a liz e d v e r s i o n o f t h e m o d el,
t h e n e t w o rth c o n s t r a i n s
p a r a m e t e r iz a t io n ,
n e g a t iv e .
y,
a llo w in g
fo r th e p o s s i b i l i t y
f in a n c e and in v e s t m e n t .
a d d i t i o n a l n u is a n c e p a r a m e te r,
s in c e ,
m u l t i p l i e s p a r t o f t h e c o n s t a n t te rm .
in e q u a t io n
g>
i n n e t w o rth and
i.e .
fro m ,
s a y 0.95 t o 0 . 838.30
s lig h t ly
In a d d it io n ,
th is
im p ro v e s t h e m a rg in by w h ich
r e s t r ic t io n s .
i n t h e se co n d colum n o f T a b le 3 h i g h l i g h t t h e
i n v e s t i g a t e w h e th e r t h i s
th e
i n t h e i m p l i c i t d is c o u n t
im p o rta n c e o f t h e p e r io d s w it h la r g e s h o c k s t o n e t w o rth .
a llo w s
in d e e d n e g a t iv e
a 1- p e r c e n t a g e - p o in t d e c l i n e in
t h e m odel p a s s e s t h e t e s t o f o v e r i d e n t i f y i n g
r e s u lt s
a ls o
a l l o t h e r t h i n g s e q u a l; u s in g th e c o e f f i c i e n t
a l t e r n a t i v e p a r a m e t e r iz a t io n a l s o
The r e s u l t s
( 12 ) ,
T aken l i t e r a l l y ,
r e a l n e t w o rth w ould le a d t o a r i s e
r a t e o f 11.2 p e r c e n t ,
s h o u ld be
la r g e e f f e c t s o f movements in n e t w o rth
e s t im a t e s o b t a in e d i n t h e se co n d co lum n ,
fa rm e rs'
( 13 ) ,
We f in d t h a t y i s
in v e s t m e n t a r e p o t e n t i a l l y v e r y im p o r t a n t .
e s t im a t e d v a lu e o f y i n d i c a t e s
in
n e c e s s i t a t e s t h e e s t im a t io n o f an
and l a r g e enough t o s u g g e s t t h a t e f f e c t s o f s h i f t s
on c a p i t a l s p e n d in g ,
G iv e n t h i s
th e c o n s ta n t o f p r o p o r t io n a lit y
T h i s p a r a m e t e r iz a t io n a l s o
th a t
s p e c if ic a t io n
f o r th e p o s s i b i l i t y
is
a p p r o p r ia t e ,
To
our la s t
se t of
o f asym m etry by p e r m it t in g d i f f e r e n t
20
v a l u e s o f y i n p e r io d s o f "lo w n e t w o rth ” and " h ig h n e t w o r t h " .
f o r m e r , we a g a in u se d t h e 1921-33 and 1981-86 p e r io d s .
F o r th e
Fo r th e l a t t e r ,
we u s e t h e p e r io d s from 1955 t o 1979, a lo n g p e r io d w it h o u t im p o rta n t
d e f la t io n a r y
sh o ck s to
com m odity p r i c e s
p a r t ic u la r ,
fa rm e rs'
n e t w o rth ,
and la n d v a l u e s .
in c l u d in g p e r io d s o f r i s i n g
The r e s u l t s a r e s u g g e s t iv e .
t h e n e g a t iv e e s t im a t e o f y , w h ic h l i n k s movements i n n e t
w o rth and t h e m u l t i p l i e r on t h e c r e d i t c o n s t r a i n t ,
t h e p e r io d s o f p e r s i s t e n t l y
r e la t iv e ly
low n e t w o rth .
h ig h l e v e l s o f n e t w o rth ,
is
is o la t e d d e c lin e s
p a ra m e te r e s t im a t e s i n t h e model a r e r e l a t i v e l y
p a r a m e t e r iz a t io n ,
and t h e o v e r i d e n t i f y i n g
t h e m odel a r e s t i l l
i n e q u it y seem t o
The o t h e r
u n a f f e c t e d by t h i s
r e s t r ic t io n s
new
a s s o c i a t e d w it h
n o t r e j e c t e d by t h e d a t a .
sum m ary, t h e e m p i r i c a l t e s t s p r e s e n t e d above le n d s u p p o r t t h e
p r o p o s it io n t h a t movements in c o l l a t e r a l i z a b l e
e c o n o m ic a lly im p o rta n t f a c t o r s
s p e n d in g .
F ir s t ,
t r a c e a b l e only t o
D u rin g t h e p e r io d o f
h a v e a n e g l i g i b l e e f f e c t on e f f e c t i v e d is c o u n t r a t e s .
In
In
T h i s c o n c lu s io n
th e re
is
is
n e t w o rth a r e
i n t h e d e t e r m in a t io n o f in v e s tm e n t
s u p p o rte d by s e v e r a l p i e c e s o f e v id e n c e .
s y s te m a tic v a r ia t io n
in
in v e s tm e n t w h ic h i s
u n e x p la in e d
by t h e s t a n d a r d n e o c l a s s i c a l m o d e l, b u t w h ic h i s
s ig n if ic a n t ly
c o r r e l a t e d w it h movements i n n e t w o rth .
t h e im p o rta n c e o f t h i s
r e la t io n s h ip
in s t a n c e ,
is
S e co n d ,
m ost p ro n o u n ce d in w h ic h n e t w o rth i s
f a llin g .
m o d if y in g t h e s t a n d a r d n e o c l a s s i c a l m odel in t h e d i r e c t i o n o f
an a l t e r n a t i v e m odel in w h ic h n e t w o rth c o n s t r a i n s
f in a n c e and
in v e s t m e n t im p ro v e s t h e p e rfo rm a n c e o f t h e m o d e l.
M o re o v e r, t h e
im p rovem ent i s
p e r io d s ;
a t t r i b u t a b l e t o an e n h a n ced f i t
is
lo w .
d u r in g d e f l a t i o n a r y
t h e s t a n d a r d n e o c l a s s i c a l m odel p e rfo rm s r e a s o n a b ly w e l l i n
h ig h - n e t - w o r t h p e r i o d s ,
d is c o u n t
For
fa cto r
is
and t h e im p a ct o f d e c l i n e s
co n ce n tra te d
i n n e t w o rth on t h e
in p e r io d s i n w h ic h f a r m e r s '
n e t w o rth
21
IV .
Summary and C o n c lu s io n
R e c e n t m o d els o f f ir m
in v e s tm e n t d e c i s i o n s s t r e s s i n g p ro b le m s o f
a sy m m e tric in f o r m a t io n in c a p i t a l m a rk e ts p r o v id e a f o u n d a tio n f o r
in t e r p r e t in g
e v id e n c e t h a t movements i n
in v e s t m e n t s p e n d in g ,
i n t e r n a l f in a n c e ca n p r e d i c t
ev en a f t e r c o n t r o l l i n g
in v e s t m e n t o p p o r t u n i t i e s .
f o r m e a su re s o f f i r m s '
W h ile su ch e v id e n c e i s
s u g g e s t iv e ,
it
is
o f t e n open t o o t h e r i n t e r p r e t a t i o n s ; m ost m o d els s t r e s s t h e im p o rta n c e
o f collateralizable net worth, w h ile e m p i r i c a l s t u d i e s u s in g a g g re g a te
t i m e - s e r i e s d a t a o r f i r m - l e v e l p a n e l d a t a h a v e em ployed p r o x ie s su ch a s
cash flow .
Our p a p e r a d d r e s s e s t h i s
U .S .
gap in two w a y s.
F ir s t ,
we f o c u s on th e
a g r i c u l t u r a l s e c t o r d u r in g t h e t w e n t ie t h c e n t u r y ;
e x p e r ie n c e d la r g e
a b ilit y
f lu c t u a t io n s
of a g r ic u lt u r a l
ca n be c o n s t r u c t e d .
r e p r e s e n t a t io n s
in
in v e s t m e n t ,
S e co n d ,
n e t w o rth and i n t h e p r o f i t
and r e a s o n a b le m e a su re s o f n e t w o rth
r a t h e r th a n r e l y i n g on in v e s tm e n t f u n c t io n
(s u c h a s th e o f t e n u se d g - t h e o r y a p p r o a c h ) , we make u se
o f p r e d i c t i o n s g e n e r a t e d by f i r m s '
t io n .
fa rm e rs '
In t u it iv e ly ,
E u l e r e q u a t io n f o r c a p i t a l a cc u m u la
d u r in g p e r io d s in w h ich n e t w o rth i s
e q u a t io n s h o u ld h o ld a c r o s s a d ja c e n t p e r i o d s ;
f o r p e r io d s
b ecau se o f
h ig h ,
low n e t w o rth
b in d ) .
(lo o s e ly
s p e a k in g ,
Such an a p p ro a ch o f f e r s
in w h ic h i n t e r n a l n e t w o rth i s
o p p o r t u n it ie s ),
th e E u le r
t h e e q u a t io n w i l l n o t h o ld
in w h ic h t h e shadow p r i c e o f e x t e r n a l f in a n c e i s
c o n s t r a in t s "
p e r io d s
th e s e c t o r has
p e r io d s
h ig h
in w h ic h " f in a n c e
an a l t e r n a t i v e m odel f o r
low ( h o ld in g c o n s t a n t in v e s tm e n t
and g e n e r a t e s a l i n k b etw een i n t e r n a l n e t w o rth and
in v e s t m e n t sp e n d in g d u r in g p e r io d s o f s i g n i f i c a n t d e f l a t i o n on t h e v a lu e
o f n e t w o rt h .
Our e m p i r i c a l e v id e n c e i s
p r e s e n t e d in t h r e e p a r t s .
F ir s t ,
th e
s t r u c t u r a l m odel f o r in v e s tm e n t c o r r e s p o n d in g t o t h e s t a n d a r d
n e o c la s s ic a l
( p e r f e c t - c a p it a l- m a r k e t s )
The r e j e c t i o n
a p p ro a ch i s
r e j e c t e d by t h e d a t a .
ca n be t r a c e d to s y s t e m a t ic c o r r e l a t i o n s b etw een t h e
u n e x p la in e d com ponent o f in v e s tm e n t and movements i n
p o s it io n s .
w o rt h .
The c o r r e l a t i o n
A se co n d f i n d i n g
is
is
fa rm e rs'
n e t w o rth
s t r o n g e s t d u r in g p e r io d s o f low n e t
t h a t e x te n d in g t h e m odel t o a llo w
fo r
22
m ovements i n
e x p la in in g
fa rm e rs'
in v e s t m e n t •
in v e s t m e n t i s
T h ir d ,
im p o r t a n t ly t o
t h e e f f e c t o f c h a n g e s i n n e t w o rth on
s i g n i f i c a n t l y more im p o rta n t d u r in g t h e d e f l a t i o n a r y
p e r io d s p r e v i o u s l y
to g e th e r,
n e t e q u it y p o s i t i o n c o n t r i b u t e s
th e se
id e n t if ie d
th a n d u r in g "boom” p e r i o d s .
Tak en
f i n d i n g s p r o v id e su p p o rt f o r a c l a s s o f " i n t e r n a l fu n d s"
m o d e ls o f in v e s t m e n t u n d e r a sy m m e tric in f o r m a t io n .
We b e l i e v e t h a t t h e f in d i n g s p r e s e n t e d h e r e i l l u s t r a t e
th e
p o t e n t i a l r i c h n e s s o f r e s e a r c h p ro g ram s t o f o r m a l iz e t e s t s o f c a p i t a l m a rk e t f r i c t i o n s
and t o m easu re t h e i r
f i n a n c i a l d e c i s i o n s o f b u s in e s s f i r m s .
p a r t ic u la r ly
p r o m is in g :
(i)
lin k in g
n e o c l a s s i c a l m o d els t o p l a u s i b l e
f r i c t i o n s 31; and ( i i )
i n t e r n a l n e t w o rth o r i n s i d e r s '
r e je c t io n s o f sta n d a rd
s t r u c t u r a l a l t e r n a t i v e m o d e ls o f
d e v e lo p in g a d d i t i o n a l c a s e s t u d i e s
i n w h ic h t h e s o u r c e s o f su c h f r i c t i o n s
Two r e s e a r c h s t r a t e g i e s a r e
e x te n d in g t h e m o d e lin g a p p ro a c h t o p a n e l
d a t a on b u s in e s s c o r p o r a t io n s ,
c a p it a l- m a r k e t
im p o rta n c e f o r in v e s tm e n t and
ca n be i d e n t i f i e d
s t a k e s m e a su re d .32
o r p r o x ie s f o r
23
DATA APPENDIX
The d a t a u se d i n t h i s p a p e r a r e ta k e n from a number o f s o u r c e s and
a r e a v a i l a b l e on a d i s k e t t e from t h e a u t h o r s .
The d e t a i l s r e g a r d in g th e
d a t a s o u r c e s and d a t a c o n s t r u c t io n a r e a s f o l l o w s :
In v e s t m e n t ;
The b a s i c d a ta a r e t h e Commerce D e p a rtm e n t's c o n s t a n t - c o s t
s e r i e s f o r Farm Eq u ip m en t In v e s t m e n t .
D a ta p r i o r t o 1985 a r e p u b lis h e d
i n T a b le B -4 o f F ix e d R e p r o d u c ib le T a n g ib le W e a lth i n t h e U n it e d S t a t e s .
1925-1985 ( p u b lis h e d by t h e Commerce D e p a rtm e n t). The more r e c e n t d a ta
w ere o b t a in e d from u n p u b lis h e d Commerce D ep artm en t d a t a .
We a l s o u sed
in v e s t m e n t d a t a f o r Farm S t r u c t u r e s t o c o n s t r u c t a se co n d c a p i t a l s e r i e s
t o u s e in t h e n e t w o rth p ro x y d e s c r ib e d b e lo w .
T h e se d a t a a r e c o l l e c t e d
from t h e same s o u r c e s shown a b o v e .
C a p it a l S to c k :
The c a p i t a l s t o c k s e r i e s a r e b u i l t up u s in g a p e r p e t u a l
in v e n t o r y method w it h an assum ed d e p r e c ia t io n r a t e o f 12 p e r c e n t f o r
eq u ip m en t and 2.37 p e r c e n t f o r s t r u c t u r e s .
The i n i t i a l v a l u e s f o r t h e s e
s e r i e s w ere t a k e n from t h e 1910 C e n su s o f A g r i c u l t u r e , w h ic h i s
r e p r i n t e d in T o s t le b e ( 1957, T a b le 9 ) .
P r o p r ie t o r s ' E q u it y :
Our p ro x y f o r f a r m e r s ' n e t w o rth i s t h e r a t i o o f
farm p r o p r i e t o r s ' e q u it y t o c a p i t a l .
The e q u it y s e r i e s i s t a k e n from
T a b le 411 in M e lic h a r ( 1987) .
The c a p i t a l s e r i e s i s t h e sum o f t h e
eq u ip m en t and s t r u c t u r e s s e r i e s whose c o n s t r u c t io n was d i s c u s s e d a b o v e .
P r ic e I n d ic e s :
The la n d p r i c e in d e x we u se i s th e Farm R e a l E s t a t e
In d e x w h ich i s s t o r e d on l i n e in t h e F e d e r a l R e s e r v e B o a r d 's M acro D a ta
L ib r a r y .
The o r i g i n a l s o u r c e f o r t h i s s e r i e s i s t h e U SD A 's
Farm R e a l E s t a t e M arket D ev elo p m en ts p u b l i c a t i o n .
The GNP d e f l a t o r i s
t a k e n from t h e E co n o m ic R e p o rt o f t h e P r e s id e n t and B a lk e and
Gordon ( 1989 ) .
The in v e s tm e n t- g o o d s p r i c e d e f l a t o r i s i n f e r r e d from th e
d i f f e r e n c e b etw een t h e Commerce s e r i e s f o r n o m in a l and r e a l in v e s t m e n t .
Tax C o r r e c t i o n s :
The r e l a t i v e p r i c e o f in v e s tm e n t goods i s c o r r e c t e d
f o r t h e p r e s e n c e o f t h e d e p r e c ia t io n a llo w a n c e s and t h e in v e s tm e n t t a x
c r e d it .
Tim e s e r i e s f o r c o r p o r a t e t a x r a t e s , in v e s tm e n t t a x c r e d i t
r a t e s , and t h e p r e s e n t v a lu e o f one d o l l a r ' s w o rth o f d e p r e c i a t i o n
a llo w a n c e s a r e t a k e n from Pechman ( 1987) .
A v e ra g e P ro d u c t o f C a p i t a l :
The a v e ra g e p ro d u c t o f c a p i t a l i s
c a l c u l a t e d by t a k in g t h e r a t i o o f n e t incom e t o c a p i t a l .
Net incom e i s
t h e d i f f e r e n c e b etw een t h e g r o s s incom e and p r o d u c t io n and la b o r
exp en ses.
The " G ro s s Incom e" s e r i e s i s ta k e n from T a b le 111 in
M e lic h a r ( 1987 ) .
The " P r o d u c t io n E x p e n s e s " s e r i e s a p p e a r s in t h e USDA's
E co n o m ic I n d i c a t o r s o f t h e Farm S e c t o r . 1987 N a t io n a l F i n a n c i a l Summary,
T a b le 24 , n o t i n c l u d in g i n t e r e s t e x p e n s e .
"Lab o r ex p e n ses" a re re p o rte d
in T a b le 60 (co lu m n 2 ) o f t h e same p u b l i c a t i o n .
D a ta p r i o r t o t h a t
w h ic h a p p e a r s in t h e N a t io n a l F i n a n c i a l Summary a r e ta k e n from th e
F e d e r a l R e s e r v e B o a r d 's M acro D a ta L i b r a r y .
R a te s o f R e tu rn :
The n o m in a l i n t e r e s t r a t e u se d t o c a l c u l a t e t h e r e a l
i n t e r e s t r a t e i s a s p l i c e d r a t e t h a t co m b in es t h e a v e ra g e c o n t r a c t r a t e
on farm m o rtg a g e s o b t a in e d from b an k s and t h e P r o d u c t io n C r e d i t
A s s o c i a t i o n ' s (PCA) a v e ra g e c o s t o f lo a n s .
The s p l i c e w as n e c e s s a r y
b e c a u s e t h e PCA d id n o t e x i s t p r i o r t o 1934.
We v ie w t h i s r a t e a s th e
b e s t p ro x y f o r farm le n d in g r a t e s and t h e r e f o r e u s e i t a s soon a s i t
becom es a v a i l a b l e .
T h i s s e r i e s i s t a k e n from t h e U SD A 's A g r i c u l t u r a l
24
S t a t i s t i c s p u b lic a t io n .
The r a t e we u s e f o r t h e 1910 t o 1934 p e r io d i s
t a k e n from USDA M is c e lla n e o u s P u b l i c a t i o n 478 , "Farm -M o rtg ag e C r e d i t
F a c i l i t i e s i n t h e U n it e s S t a t e s . "
Our e x p e c te d i n f l a t i o n s e r i e s r e f e r s
t o t h e GNP d e f l a t o r , and f o llo w s t h e p ro c e d u r e i n G ordon and V e i t c h
( 1986 ) .
The r e a l r a t e o f c a p i t a l g a in s on farm d e b t w as a l s o u se d a s an
in s t r u m e n t .
T h i s s e r i e s was ta k e n from T a b le 101 o f M e lic h a r ( 1987 ) .
A g r ic u lt u r a l E x p o rts :
T h i s s e r i e s i s a l s o u se d a s an in s t r u m e n t i n t h e
e s t im a t io n .
I t i s t a k e n from t h e Eco n o m ic R e p o rt o f t h e P r e s i d e n t .
1988; US F o r e ig n A g r i c u l t u r e S t a t i s t i c s — C a le n d a r Y e a r Su p p lem en t f o r
1970? and H i s t o r i c a l S t a t i s t i c s o f t h e U n it e d S t a t e s from t h e C o l o n i a l
T im e s t o 1970 .
The d a t a from t h e f i r s t two s o u r c e s a r e on a c a le n d a r y e a r b a s i s and a r e a v a i l a b l e b a c k t o 1930 .
The d a t a from t h e H i s t o r i c a l
S t a t i s t i c s a r e on a f i s c a l - y e a r b a s i s ; we s p l i c e d t h e two s e r i e s
a ssu m in g t h a t g ro w th r a t e s a c r o s s f i s c a l y e a r s i s t h e same a s a c r o s s
c a le n d a r y e a r s .
G overnm ent Paym ents and L e n d in g :
D a ta on t h e v a lu e o f t o t a l governm ent
p aym ents t o f a r m e r s was a l s o u se d a s an in s t r u m e n t a l v a r i a b l e .
T h is
s e r i e s i s t a k e n from t h e USDA p u b l i c a t i o n t i t l e d A g r i c u l t u r a l
S t a t is t ic s .
The m ost r e c e n t d a t a come from T a b le 583 i n t h e 1988
e d it io n .
D a ta from e a r l i e r e d i t i o n s a lo n g w it h t h e H i s t o r i c a l
S t a t i s t i c s o f t h e U n it e d S t a t e s from C o l o n i a l T im e s t o 1970 w ere u se d t o
c o n s t r u c t t h e c o m p le te s e r i e s .
The v a lu e o f F a rm e rs Home A d m in is t r a t io n
(FmHa) le n d in g was a l s o u se d i n c o n s t r u c t in g an in s t r u m e n t .
T h ese d a ta
a r e t a k e n from T a b le 511 i n M e lic h a r ( 1987) .
The GNP d e f l a t o r w as u se d
t o c o n v e r t b o th t h e s e n o m in a l s e r i e s in t o c o n s t a n t d o l l a r s e r i e s .
25
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Pechm an, J o s e p h A . F e d e r a l Tax P o l i c y . F i f t h
B r o o k in g s I n s t i t u t i o n , 1987.
e d it io n .
W a sh in g to n , D . C . :
R e i s s , P e t e r C . "Eco n o m ic and F i n a n c i a l D e te rm in a n ts o f O i l and G as
E x p l o r a t i o n A c t i v i t y . " In A sy m m e tric In f o r m a t io n . C o r p o r a t e
F in a n c e , and In v e s t m e n t , e d it e d by R . G le n n H u b b ard . C h ic a g o :
U n i v e r s i t y o f C h ic a g o P r e s s , 1990 .
S t i g l i t z , J o s e p h E . , and W e is s , A ndrew . " C r e d it R a t io n in g i n M a rk e ts
w it h Im p e r f e c t I n f o r m a t io n ," A m e rica n Eco n o m ic R e v ie w 71 (Ju n e
1981) : 393- 410 .
S to ck ,
Jam es H.
" R e a l E s t a t e M o rtg a g e s,
F o r e c lo s u r e s ,
and M id w e ste rn
28
A g r a r ia n U n r e s t ,
1984 ) s 89- 105.
1865- 1920. ” J o u r n a l o f Eco n o m ic H i s t o r y 43 (M arch
Sum m ers, L a w re n c e H. " T a x a t io n and C o r p o r a t e In v e s t m e n t : A- g -T h e o ry
A p p ro a c h ." B r o o k in g s P a p e r s on Eco n o m ic A c t i v i t y ( 1981 : 1 ) : 67- 127 .
T o s t l e b e , A l v i n S . C a p i t a l i n A g r i c u l t u r e : I t s F o rm a tio n and F in a n c in g
S in c e 1870 .
P r in c e t o n : P r in c e t o n U n i v e r s i t y P r e s s , 1957 .
U.S.
D ep a rtm e n t o f A g r i c u l t u r e . A g r i c u l t u r a l S t a t i s t i c s , v a r io u s
e d i t i o n s . W a sh in g to n , D . C . :
U . S . G overnm ent P r i n t i n g O f f i c e .
U.S.
D ep a rtm e n t o f A g r i c u l t u r e . Eco n o m ic R e s e a r c h S e r v i c e , Eco n o m ic
I n d i c a t o r s o f t h e Farm S e c t o r :
N a t io n a l F i n a n c i a l Summary, 1987.
W a sh in g to n , D . C . :
U . S . D ep artm en t o f A g r i c u l t u r e .
U.S.
D ep artm e n t o f Commerce, B u rea u o f E co n o m ic A n a l y s i s . F ix e d
R e p r o d u c ib le T a n g ib le W e a lth i n t h e U n it e d S t a t e s , 1925- 85 .
W a sh in g to n , D . C . :
U . S . Governm ent P r i n t i n g O f f i c e .
W h ite d , T o n i M. " D e b t, L i q u i d i t y C o n s t r a i n t s , and C o r p o r a t e In v e s t m e n t :
E v id e n c e from P a n e l D a t a ." J o u r n a l o f F i n a n c e , f o r th c o m in g , 1991.
W o o d ru ff, A r c h ib a ld M ., J r . Farm M ortgage L o a n s o f L i f e In s u r a n c e
C o m p a n ie s.
New H aven : Y a le U n i v e r s i t y P r e s s , 1937 .
Z e ld e s , S te p h e n . "C o n su m p tio n and L i q u i d i t y C o n s t r a i n t s : An E m p i r i c a l
I n v e s t i g a t i o n . " J o u r n a l o f P o l i t i c a l Economy 97 ( A p r i l 1989 ) : 305346 .
29
N o te s
We a r e g r a t e f u l t o R o la n d Benabou, R ic h a r d B l u n d e l l , W illia m
B r a in a r d , C h a r le s C a l o m i r i s , B e n ja m in F rie d m a n , M ark G e r t l e r , B ru c e
G re e n w a ld , Z v i G r i l i c h e s , K e v in H a s s e t t , C h a r le s H im m elb erg , Bengt
H o lm stro m , M ervyn K in g , F r e d e r i c M is h k in , A r i e l P a k e s , B ru c e P e t e r s e n ,
Jo h n R o s in e , A n d r e i S h l e i f e r , N ic h o la s W a lra v e n , and D a v id Webb;
p a r t i c i p a n t s i n s e m in a r s a t t h e 1989 NBER Summer I n s t i t u t e , t h e NBER
C o n f e re n c e on F irm and I n d u s t r y D y n a m ic s, B o ard o f G o v e rn o rs o f th e
F e d e r a l R e s e r v e S y ste m , C o lu m b ia U n i v e r s i t y , I n s t i t u t e f o r F i s c a l
S t u d i e s , L a v a l U n i v e r s i t y , London S c h o o l o f E c o n o m ic s , U n i v e r s i t y o f
M a ry la n d , N o r th w e s te rn U n i v e r s i t y , U n i v e r s i t y o f P e n n s y lv a n ia , and Y a le
U n i v e r s i t y ? and two anonymous r e f e r e e s f o r h e l p f u l comments and
s u g g e s t io n s .
W illia m Kan p ro v id e d e x c e l l e n t r e s e a r c h a s s i s t a n c e .
F i n a n c i a l s u p p o r t was g iv e n by t h e F a c u l t y R e s e a r c h Fund o f t h e G ra d u a te
S c h o o l o f B u s in e s s o f C o lu m b ia U n i v e r s i t y .
‘S ee t h e d e r i v a t i o n
in H a l l and J o rg e n so n
2See f o r exam p le H a y a s h i
( 1967 ) .
( 1982) and Summers ( 1981 ) .
V a r i o u s fo rm s o f " a c c e l e r a t o r ” m odels a p p e a r t o f i t t h e d a ta
b e t t e r t h a n t h e more s t r u c t u r e d q o r n e o c l a s s i c a l m o d els ( s e e t h e r e v ie w
o f s t u d i e s i n F a z z a r i , H ubbard, and P e t e r s e n , 1988 ) .
R e c e n t ly , A b e l and
B la n c h a r d ( 1986 ) found s t r o n g o u tp u t and p r o f i t s e f f e c t s on a g g re g a te
in v e s t m e n t in a q m o d e l.
4S ee f o r exam p le J a f f e e and R u s s e l l ( 1976 ) , L e la n d and P y le ( 1977) ,
S t i g l i t z and W e is s ( 1981) ; G re e n w a ld , S t i g l i t z , and W e is s ( 1984) ; M yers
and M a jlu f ( 1984 ) ; B e rn a n k e and G e r t l e r ( 1990) ; C a l o m i r i s and Hubbard
( 1989 , 1990 ) ; and t h e r e v ie w o f a p p ro a c h e s i n H ubbard ( 1990 ) .
5R e la t e d i s s u e s h a v e , been a d d re s s e d in m o d els o f co n su m p tio n .
One
ca n s o lv e f o r "co n su m p tio n f u n c t io n s " o u t o f (human and nonhuman) w e a lt h
from c o n s u m e rs ' in t e r t e m p o r a l u t i l i t y m a x im iz a t io n .
A l t e r n a t i v e l y , th e
a p p ro a ch p io n e e r e d by H a l l ( 1978) m akes u s e o f t h e E u l e r e q u a t io n ,
a v o id in g t h e p ro b le m s o f m e a su rin g w e a lt h .
T h i s a p p ro a ch h a s been u se d
i n a t e s t f o r " l i q u i d i t y c o n s t r a i n t s " by Z e ld e s ( 1989 ) , who f i n d s t h a t
t h e E u l e r e q u a t io n h o ld s f o r " h ig h w e a lth " i n d i v i d u a l s , b u t i s r e j e c t e d
f o r "lo w w e a lt h " i n d i v i d u a l s , f o r whom c u r r e n t r e s o u r c e s h e lp t o p r e d i c t
c o n s u m p tio n .
V s i n g p a n e l d a t a on U . S . m a n u fa c tu rin g f i r m s , F a z z a r i , H ubb ard,
and P e t e r s e n ( 1988 ) g ro u p ed f ir m s by lo n g - r u n d iv id e n d p a y o u t i n o r d e r
t o t e s t w h e th e r t h e s e n s i t i v i t y o f in v e s tm e n t s p e n d in g t o i n t e r n a l
f i n a n c e , h o ld in g c o n s t a n t in v e s tm e n t o p p o r t u n it ie s (m e asu re d by g ) ,
v a r ie d s y s t e m a t ic a lly a c r o s s g ro u p s.
Th ey found t h a t e x c e s s s e n s i t i v i t y
t o e x p e c t e d m ovements i n f ir m c a s h flo w w ere a f e a t u r e o f lo w -p a y o u t
f i r m s , w h ic h w ere p r i m a r i l y s m a l l e r , r a p i d l y g ro w in g e n t e r p r i s e s .
In a
s i m i l a r v e i n , H o s h i, K a sh y a p , and S c h a r f s t e i n ( 1991) e x p l o it e d J a p a n e s e
p a n e l d a t a , g ro u p in g f ir m s a c c o r d in g t o w h e th e r t h e y w ere members o f
i n d u s t r i a l g r o u p s , o r keiretsu.
Th ey f in d t h a t m em b ership i n a group
and t h e p r e s e n c e o f a g rou p "m ain bank" a r e im p o rta n t i n t h e p r o v i s i o n
o f in f o r m a t io n and t h e a v o id a n c e o f c r e d i t r a t i o n i n g when in v e s tm e n t
o p p o r t u n i t i e s a r e p r o m is in g .
W h ile l i q u i d i t y e f f e c t s on in v e s tm e n t a r e
q u i t e im p o rt a n t f o r n o n -g ro u p f i r m s , th e y a r e much l e s s im p o rta n t f o r
member f i r m s .
7An a l t e r n a t i v e t o u s in g f i n a n c i a l v a r i a b l e s a s p r o x ie s f o r
m a r g in a l g i s t o u s e a f o r e c a s t i n g a p p ro a c h , a s i n A b e l and B la n c h a r d
( 1986 ) .
As t h a t a p p ro a ch r e q u i r e s im p o sin g s t r u c t u r e on t h e e x p e c t a
t i o n s p r o c e s s , i t i s s u b je c t t o t h e L u c a s ( 1976 ) c r i t i q u e . 8
8T h i s , o f c o u r s e , d o e s n o t im p ly t h a t p ro b le m s a r i s i n g from
a sy m m e tric in f o r m a t io n i n f i n a n c i a l m a rk e ts c a n n o t be im p o rta n t f o r
30
la r g e f ir m s .
S ee d i s c u s s i o n
H u b b ard , and K a sh y a p ( 1991 ) .
i n G e r t l e r and H ubbard ( 1988 ) and G e r t l e r ,
’W o o d ru ff ( 1937 ) c o n c lu d e d t h a t , d u r in g t h e D e p r e s s io n o f t h e
1930s , p o o r s o i l m a in te n a n c e p r a c t i c e s w ere th o u g h t by le n d in g a g e n ts o f
l i f e in s u r a n c e co m p a n ies t o accom pany c r e d i t c o n s t r a i n t s f o r f a r m e r s .
More r e c e n t l y , L e e ( 1980 ) n o t e s a r e l a t i o n s h i p b etw een un com m itted c a s h
f lo w s and e x p e n s e s f o r s o i l c o n s e r v a t io n .
10The q u e s t io n a r i s e s a s t o w h e th e r an o b s e r v e d s e n s i t i v i t y o f
in v e s t m e n t sp e n d in g t o movements i n n e t w o rth o r i n t e r n a l f in a n c e m ig h t
r e f l e c t " r i s k a v e r s io n " on t h e p a r t o f f a r m e r s .
We c h o s e n o t t o model
r i s k a v e r s io n i n t h i s c o n t e x t f o r two r e a s o n s .
F i r s t , r is k - a v e r s e
f a r m e r s c o u ld hedge i n f u t u r e s m a rk e ts o r s e l l o u tp u t v i a lo n g -te rm
c o n t r a c t s t o r i s k - n e u t r a l b o rr o w e r s ( a s i n C a r l t o n , 1979 ; o r H ubbard and
W e in e r, 1991 ) .
S e c o n d , t h a t fa r m e r s a p p e a r t o c a r e a b o u t t h e v a r ia n c e
o f c a s h f lo w s need n o t r e f l e c t r i s k a v e r s io n p e r s e .
A v e r y la r g e
f r a c t i o n o f f a r m e r s ' n e t w o rth i s h e ld i n farm la n d , so t h a t t h e i r
p o r t f o l i o s a r e p o o r ly d i v e r s i f i e d .
T h is la c k o f d i v e r s i f i c a t i o n
c o r r e s p o n d s more c l o s e l y t o t h e c a p it a l- m a r k e t f r i c t i o n s we d i s c u s s ,
w h e r e in i n s i d e r s ' s t a k e s i n p r o j e c t s a r e im p o r t a n t , h o ld in g c o n s t a n t
in v e s t m e n t o p p o r t u n i t i e s .
“ T h a t i s , we assum e t h a t t h e d i s s o c i a t i o n o f fa rm o w n e rs h ip and
management le a d s t o e f f i c i e n c y l o s s e s a s s o c i a t e d w it h a g e n cy c o s t s (s e e
e . g . J e n s e n and M e c k lin g , 1976, 1979 ) .
As an e x a m p le , s e p a r a t io n o f
e q u it y o w n e rs h ip and management ca n c r e a t e d i s i n c e n t i v e s f o r s o i l
c o n s e r v a t io n and m a in te n a n c e (h e n ce d e c r e a s in g o u tp u t i n t h e f u t u r e )
b e c a u s e o f s h o r t - t e r m l e a s e s o r i n e q u i t a b l e s h a r in g o f t h e b e n e f i t s and
c o s t s o f c o n s e r v a t io n in v e s t m e n t s ( s e e C a l o m i r i s , H u b b ard , and S t o c k ,
1986 ) .
,2We do n o t p a r a m e t e r iz e t h e F f u n c t io n ow ing t o d a t a
c o n s i d e r a t i o n s , p r i n c i p a l l y t h e i n a b i l i t y t o o b t a in r e l i a b l e
i n d i v i d u a l v a r i a b l e p r o d u c t io n i n p u t s .
,3T h e r e a r e a l s o
fa c t o r s , of co u rse .
14T h i s
d a t a on
f i r s t - o r d e r c o n d it io n s f o r la n d and v a r i a b l e
f o r m u la t io n assu m es co n v ex a d ju s tm e n t c o s t s .
,3T h e r e a r e o t h e r p l a u s i b l e s p e c i f i c a t i o n s o f a d ju s tm e n t c o s t s , o f
co u rse .
F o r e x a m p le , A b e l ( 1983 ) and B la n c h a r d and F i s c h e r ( 1989 )
d i s c u s s m o d e ls f o r w h ic h A ( I t) * g l* ,g > 0 , e>l.
We w an ted t o p r e s e r v e
c o m p a r a b ilit y o f o u r a p p ro a c h w it h e x i s t i n g d e r i v a t i o n s i n t h e g - t h e o r y
a p p ro a c h ( s e e f o r ex am p le H a y a s h i, 1982 ; Summers, 1981 ; and F a z z a r i ,
H u b b ard , and P e t e r s e n , 1988 ) .
,6A n o t h e r way t o in c o r p o r a t e t h i s f e a t u r e w ould be t o a llo w B t o
depend o n , s a y , a s s e t v a l u e s l e s s d e b t .
I f we d e n o te n e t w o rth by W,
t h e c o n s t r a i n t on f in a n c e w ould th e n be
or
Bt s
Bt £ dwt - l if
d is
a c o n s t a n t le v e r a g i n g
t h e n become
If,
(1 ♦ <fc) - Et[Pt(l ♦ i » ) ( l ♦
f o r e x a m p le ,
ca n be s i m p l i f i e d
fa cto r.
* po>t + u ^ ^ ,
q
to
E q u a t io n
~
w h ere E
( 5')
i n t h e t e x t w ould
♦ Et[ptdu\^] = 0 .
^
= Pwt ' th e n t h i s
31
(1 + <*) - E t[j3t( l + i t) ( l + <**,)] - ( l - j 3t)d p q = 0 .
l7T h i s p o in t i s r e l a t e d t o t h e E u l e r e q u a t io n f o r m u la t io n g e n e r a l l y .
S ee f o r ex am p le t h e d i s c u s s i o n i n t h e c o n t e x t o f " l i q u i d i t y c o n s t r a i n t s ”
and co n su m p tio n i n Z e ld e s ( 1989) .
18T h e s e i s s u e s a r e d i s c u s s e d i n d e t a i l i n G a le
( 1983 , C h a p te r 4 ) .
19We v a r i e d t h i s r a t e betw een 0.10 and 0 . 20 , and found t h a t none o f
t h e r e s u l t s was s u b s t a n t i v e l y a f f e c t e d .
^ o s t l e b e ( 1957 ) n o te s t h a t , h i s t o r i c a l l y , m ost n o n - r e a l - e s t a t e
d e b t i s u se d t o f in a n c e eq u ipm en t in v e s tm e n t r a t h e r th a n a d d it io n s to
w o rk in g c a p i t a l .
2IThe im p lie d c a p i t a l s t o c k a r i s i n g from t h e r e p o r t e d in v e s tm e n t
s e r i e s f o r a g r i c u l t u r a l s t r u c t u r e s i s s u s p i c i o u s , d e c l i n i n g f o r most o f
t h e f i r s t h a l f o f t h e sam p le and th e n r i s i n g o v e r t h e se co n d p a r t o f th e
sa m p le .
^ o s e e t h i s , l e t F = Kc*NbK.cL 1'#‘b“c , w here K. and K, r e f e r t o t h e
c a p it a l sto ck s
We u s e a s o u r p ro x y f o r t h e a v e ra g e p ro d u c t o f equipm ent
c a p it a l
F c w here F c = V a lu e o f a g r i c u l t u r a l p r o d u c t io n - p r o d u c t io n e x p e n s e s .
V a lu e o f eq u ipm en t c a p i t a l
U s in g t h e C o b b -D o u g la s a s s u m p tio n ,
c a p i t a l Fc i s
t h e m a r g in a l p ro d u c t o f eq uipm ent
g iv e n by Fc = ( a / ( l - b ) )
D e n o tin g t h e e s t im a t e d
F e.
"sh a re c o e f f ic ie n t "
t h e im p lie d eq u ip m en t s h a r e a i s
by e ,
g iv e n by y e ( l - b )
a = e(l-b)/a,
so t h a t
.
^ G iv en o u r s e t u p , t h e c o n s t a n t term and t h e c o e f f i c i e n t on t h e
d is c o u n t f a c t o r f3 a r e e a c h n o n lin e a r f u n c t io n s o f two p a r a m e te rs from
t h e a d ju s t m e n t c o s t f u n c t io n , p and a0, w h ich c a n n o t be s e p a r a t e l y
id e n t if ie d .
H en ce, t h e r e i s no l o s s from e s t im a t in g f r e e l y t h e s e
p a r a m e t e r s , and t h e r e b y n o t t r y i n g t o im p a rt t o them a s t r u c t u r a l
in t e r p r e t a t io n .
^ h i s c a l c u l a t i o n i s b a se d upon t h e l i n e a r r e l a t i o n s h i p b etw een q
and ( I / K ) i n t h i s s e t u p .
More s p e c i f i c a l l y , s u b s t i t u t i n g e q u a t io n ( 7 )
i n t o e q u a t io n ( 3 ) y i e l d s q = X = p^ag+a, ( I /K-/J) .
The r e p o r t e d r e s u l t
f o llo w s from a ssu m in g t h a t i f ( i ) a d ju s tm e n t c o s t s a r e i n te rm s o f g r o s s
in v e s t m e n t ; ( i i ) a*, * 0 ; ( i i i ) p 1 « 1 ; and ( i v ) t h e n e t in v e s tm e n t r a t e
i s e q u a l to p in th e ste a d y s t a t e .
^The w o rk in g p a p e r v e r s io n o f t h i s
paper
(H ubbard and K a sh y a p ,
1990 ) p r o v id e s r e s u l t s a n a lo g o u s t o w hat f o llo w s u s in g t h e s p e c i f i c a t i o n
w it h a c o n s t a n t d is c o u n t
fa cto r.
^ e u s e ch a n g e s in n e t w o rth in e q u a t io n ( 13 ) , r a t h e r th a n t h e
l e v e l o f n e t w o rt h , i n o r d e r t o m a in t a in c o m p a r a b ilit y w it h t h e m odels
o f i n f o r m a t i o n a l l y r e l a t e d c a p it a l- m a r k e t f r i c t i o n s we d i s c u s s e d in
s e c t io n I .
I n t h e m o d els o f G e r t l e r and H ubbard ( 1988 ) and G e r t l e r ,
H u b b ard , and K a sh y a p ( 1991 ) , t h e level o f n e t w o rth m a t t e r s f o r t h e
d e t e r m in a t io n o f t h e capital stock, h o ld in g c o n s t a n t in v e s tm e n t
o p p o r t u n i t i e s , when f ir m i n s i d e r s h ave p r i v a t e in f o r m a t io n ab o u t t h e
32
a l l o c a t i o n o f fu n d s f o r in v e s t m e n t .
H e n ce , t h e ch an g e i n t h e c a p i t a l
s t o c k , Investment, d epen ds on t h e change i n n e t w o rth .
^ H a y a sh i and In o u e ( 1991 ) h a v e c o r r e c t l y c r i t i c i z e d t h e u s e o f
" c a s h flo w " a s a p ro x y f o r a * s i n c e movements i n c a s h f lo w may be
c o r r e l a t e d w it h s h o c k s t o t h e p r o d u c t io n f u n c t io n (w h ic h a r e n o t
e x p l i c i t l y c o n s id e r e d h e r e ) .
I n o u r c a s e , movements i n t h e n e t w o rth
v a r i a b l e s a r e ( h i s t o r i c a l l y ) i n la r g e p a r t a c c o u n te d f o r by
r e d i s t r i b u t i o n s ( i . e . , " d e b t d e f l a t i o n s " ) so t h a t an y c o r r e l a t i o n w it h
s h i f t s in t h e p r o d u c t io n f u n c t io n a r e much w e a k e r.
F o r e x a m p le , d u r in g
t h e " d e b t - d e f la t io n a r y " e p is o d e s i n t h e e a r l y 1920s and 1930s , t h e
d e c l i n e i n f a r m e r s ' n e t w o rth a s a r e s u l t o f r e v a l u a t i o n o f e x i s t i n g
d e b t was o v e r h a l f a s l a r g e a s t h e c o n t r ib u t io n from t h e d e c l i n e i n
a s s e t ( l a r g e l y la n d ) v a l u e s ( s e e M e lic h a r , 1987, T a b le 101 ) .
H en ce,
r e d u c t io n s i n n e t w o rth w ere s i g n i f i c a n t , h o ld in g c o n s t a n t any ch an ge in
a g r i c u l t u r a l in v e s t m e n t o p p o r t u n i t i e s .
^ e e x p e rim e n te d w it h p r o x ie s f o r f e d e r a l farm le n d in g th ro u g h t h e
F a rm e rs Home A d m in is t r a t io n i n p a r a m e t e r iz in g ( 13 ) ( t r e a t i n g su c h
le n d in g a s e n d o g e n o u s ), b u t we w ere u n a b le t o i s o l a t e any im p o rta n t
e f f e c t i n lo w e r in g t h e m u l t i p l i e r a s s o c i a t e d w it h t h e n e t w o rth
c o n s t r a in t .
^ e
th a n k one o f t h e r e f e r e e s
fo r t h is
s u g g e s t io n .
^ h e im p a ct may be e v e n l a r g e r g iv e n t h e m easurem ent d i f f i c u l t i e s
a s s o c i a t e d w it h t h e m ost r e c e n t farm d e b t c r i s i s .
S p e c if ic a lly , our
m ea su re o f n e t incom e o f fa r m e r s in c l u d e s d i r e c t p aym ents u n d e r
g o vern m en t p ro g ra m s, b u t i t d o e s n o t in c o r p o r a t e i m p l i c i t s u b s i d i e s from
r e n e g o t ia t e d d e b t s e t t le m e n t s o r p a r t i a l o r c o m p le te lo a n c h a r g e o f f s .
D u rin g t h e m id d le 1980s t h e r e w ere s u b s t a n t i a l i n j e c t i o n s o f fu n d s from
t h e E co n o m ic D i s a s t e r Program and Farm O p e r a t in g Lo an Program o f t h e
F a rm e rs Home A d m in is t r a t io n (FmHA).
Though t h e r e w ere o f f i c i a l fu n d in g
l i m i t s p r e s c r i b e d by t h e C o n g r e s s , some lo a n p ro g ram s ( e . g . , t h e Fm H a's
Eco n o m ic D i s a s t e r Program ) had e n t it le m e n t s t a t u s w it h b ro a d fu n d in g
l i m i t s , so t h e S e c r e t a r y o f A g r i c u l t u r e c o u ld t r a n s f e r fu n d s from them
t o o p e r a t in g lo a n p ro g ram s t o c ir c u m v e n t o f f i c i a l le n d in g c e i l i n g s ( s e e
C a l o m i r i s , H u b b ard , and S t o c k , 1986) .
To t h e e x t e n t t h a t t h i s e x t r a
le n d in g o r re d u c e d d e b t b u rd e n s was im p o r t a n t , f a r m e r s ' e f f e c t i v e
r e s o u r c e s w o uld be u n d e r s t a t e d , and o u r e s t im a t e o f y w ould be to o lo w .
31S ee f o r ex am p le H u bb ard, K a sh y a p and W h ite d ( 1991) . P a k e s
a n a ly z e s some s t r u c t u r a l m o d e lin g a p p ro a c h e s f o r t h i s p ro b le m . 3
2
( 1991 )
32One ex am p le i s t h e c a r e f u l s t u d y o f h e t e r o g e n e it y i n f i n a n c in g
c o n s t r a i n t s on o i l f i r m s ' d r i l l i n g and e x p l o r a t io n a c t i v i t i e s i n R e i s s
( 1990 ) .
A n o th e r p o s s i b l e a p p l i c a t i o n w ould be t o f ir m h e t e r o g e n e it y i n
f i n a n c i n g a rra n g e m e n ts and in v e s tm e n t d e c i s i o n s i n yo u n g , t e c h n o lo g y
in t e n s iv e in d u s t r ie s .
F i n a l l y , C a l o m i r i s and H ubbard ( 1991 ) c o n s id e r
t h e e f f e c t s o f ex o g e n o u s ch a n g e s in t h e r e l a t i v e c o s t o f i n t e r n a l
f in a n c e a r i s i n g a s a r e s u l t o f c e r t a i n t a x c h a n g e s .
TABLE 1
SUMMARY S T A T IS T IC S FOR INVESTMENT AND MEASURES OF NET WORTH
In v e s t m e n t
C a p it a l
A n n u a l % Change i n
R e l a t i v e Lan d P r i c e
S ta n d a r d
D e v ia t io n
P e r io d
Mean
1914-87
.15
.05
1914-39
.15
.05
1948-87
.14
1921- 33 ;
1981-86
Mean
A n n u a l % Change in
E q u it y t o A s s e t s R a t io
S ta n d a rd
D e v ia t io n
Mean
S ta n d a rd
D e v ia t io n
6 . 47%
. 18%
7 . 98%
- 2.41
6.30
.15
9.96
.05
1.01
6.24
-.36
6.85
.11
.04
- 5.13
7.41
-.31
10.18
1955-79
.15
.02
3.31
3.64
.37
5.09
SOURCE -
A u t h o rs ' c a l c u l a t i o n s a s d e s c r ib e d
- . 13%
in th e t e x t .
TABLE 2
EU LER EQUATION ESTIM ATES FOR INVESTMENT MODEL
(U.S.
AGRICULTURAL SECTOR,
- - - - B a s i c M odel ( e q u a t io n
T im e - V a ry in g
C o n s t a n t ft
P a ra m e te r
C o n s ta n t
-.118
( . 064 )
C o n s t a n t ^ is c o u n t
f a c t o r (fi)
1.05
( 0 . 265 )
.040
S h a r e p a ra m e te r
( . 019 )
C o n s ta n t a s s o c i a t e d
w it h t im e - v a r y in g p
X2 - O r t h o g o n a lit y t e s t
(p v a lu e )
( 11 ) - - - - (No N et W orth In s t r u m e n t ) ^ —
C o n sta n t p
T im e - V a ry in g
.054
( . 108 )
1.15
( 0 . 211 )
2.59
( . 679 )
1.66
( - 441 )
.043
-.011
( . 026 )
.050
( - 012 )
( . 008 )
1.62
( . 224 )
23.9
( . 008 )
- 1.41
( . 273 )
1.17
( . 099 )
.992
( . 073 )
A d ju stm e n t c o s t
c o e f f i c i e n t (a, )
- 1.70
( - 214 )
1914- 1987 )
22.0
( . 015 )
1.31
( . 286 )
8.38
( . 496 )
12.8
( . 171 )
NOTE - The m o d els a r e e s t im a t e d u s in g g e n e r a l i z e d method o f
m om ents.
I n s t r u m e n t a l v a r i a b l e s in c l u d e a c o n s t a n t ; a s i n g l e la g
o f I / K , ( I / K ) 2, and t h e a v e ra g e p ro d u c t o f farm eq u ip m en t c a p i t a l ;
t h e ch a n g e i n t h e r a t i o o f r e a l a g r i c u l t u r a l e x p o r t s t o K ; t h e
ch an g e in F a r m e r s ' Home A d m in is t r a t io n le n d in g (n o r m a liz e d by K ) ;
t h e ch an g e in r e a l governm ent paym ents t o f a r m e r s (n o r m a liz e d by
K ) ; t h e ch an g e in t h e r a t i o o f f a r m e r s ' e q u it y t o a s s e t s ; t h e r a t e
o f r e a l c a p i t a l g a in s on farm d e b t ; a s i n g l e la g o f t h e c o n s t r u c t e d
ex ante r e a l i n t e r e s t r a t e ; and c u r r e n t and o n c e - la g g e d v a l u e s o f
t h e r e l a t i v e p r i c e o f eq u ip m en t in v e s tm e n t goods and t h e lo g o f t h e
r e l a t i v e p r i c e o f a g r i c u l t u r a l la n d .
( R e l a t i v e p r i c e s a r e d e f in e d
w it h r e s p e c t t o t h e p r i c e d e f l a t o r f o r t h e G r o s s N a t io n a l P r o d u c t ) .
H e t e r o s c e d a s t ic it y - c o n s is t e n t sta n d a rd e r r o r s a re re p o rte d in
p a re n th e se s.
TABLE 3
EU LER EQUATION ESTIM ATES FOR ALTERNATIVE INVESTMENT MODEL
( U . S . AGRICULTURAL SECTOR, 1914- 1987 )
B a s e l i n e Model
( E x c lu d in g 1921- 33 ;
1981- 86 )
P a ra m e te r
C o n sta n t
- 2.45
( . 220 )
A d ju s t m e n t - c o s t
c o e f f i c i e n t (a, )
S h a re P a ra m e te r
C o n sta n t
( T im e - v a r y in g jS)
--------Net W orth E f f e c t s ------P e r io d s w it h
S e p a ra te E f f e c t s fo r
Low L e v e l s
"Boom and " B u s t ”
o f E q u it y
P e r io d s
- 2.08
( . 194 )
- 2.02
( . 330 )
.219
.413
.475
( . 319 )
( . 316 )
( . 364 )
.062
.051
.053
( . 007 )
( . 007 )
( . 009 )
2.41
( . 233 )
2.03
( . 207 )
1.97
( . 352 )
-•112
( . 028 )
-•121
( . 032 )
P r o p o r t i o n a l i t y f a c t o r (y )
betw een c r e d i t - c o n s t r a i n t
m u l t i p l i e r (u ) and ch an g e in
n e t w o rth ( 1921- 33 ; 1981- 86 )
S h i f t i n c o n s t a n t due t o
tim e v a r y in g c r e d i t - c o n s t r a i n t
m u l t i p l i e r (w) ( 1921- 33 ; 1981- 86 )
.093
.165
( . 024 )
( . 264 )
y : "Boom" p e r io d s
( 1955- 79 )
( . 028 )
S h if t in c o n s ta n t
(boom p e r io d s )
-.135
( . 219 )
X 2— O r t h o g o n a lit y t e s t
(p v a lu e )
.103
16.6
( . 083 )
15.4
( . 117 )
13.7
( . 132 )
NOTE - The m o d els a r e e s t im a t e d u s in g g e n e r a liz e d method o f m oments.
I n s t r u m e n t a l v a r i a b l e s i n c l u d e a c o n s t a n t ; a s i n g l e la g o f I / K , ( I / K ) 2, and
t h e a v e ra g e p ro d u c t o f farm eq u ipm en t c a p i t a l ; t h e ch an g e in t h e r a t i o o f
a g r i c u l t u r a l e x p o r t s t o K ; t h e ch an g e in F a r m e r s ' Home A d m in is t r a t io n le n d in g
( n o r m a liz e d by K ) ; t h e ch a n g e in r e a l governm ent paym ents t o fa r m e r s
( n o r m a liz e d by K ) ; t h e ch an g e i n t h e r a t i o o f f a r m e r s ' e q u it y t o a s s e t s ; th e
r a t e o f r e a l c a p i t a l g a in s on farm d e b t ; a s i n g l e la g o f t h e c o n s t r u c t e d ex
ante r e a l i n t e r e s t r a t e ; and t h e c u r r e n t and o n c e - la g g e d v a l u e s o f t h e
r e l a t i v e p r i c e o f eq u ip m e n t in v e s tm e n t goods and t h e lo g o f t h e r e l a t i v e p r i c e
o f a g r i c u l t u r a l la n d ( R e l a t i v e p r i c e s a r e d e f in e d w it h r e s p e c t t o t h e p r i c e
d e f l a t o r f o r t h e G r o s s N a t io n a l P r o d u c t ) .
A d d i t io n a l dummy v a r i a b l e s a r e u se d
a s in s t r u m e n t s i n m o d e ls i n w h ich p a r a m e te rs a r e a llo w e d t o v a r y o v e r c e r t a i n
p e r io d s .
H e t e r o s c e d a s t ic it y - c o n s is t e n t sta n d a rd e r r o r s a re re p o rte d in
p are n th e se s.
Figu r e 1
I n v e s t m e n t in Agricultural E q u i p m e n t
F i gure 2
L a n d Prices Relative to G N P Deflator
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
1920
1930
1940
1950
1960
1970
1980
Percent C h a n g e in Relative Price of L a n d
20
15
10
5
0
-5
-10
-15
-20
-25
1920
1930
1940
1950
1960
1970
1980
Figure 3
@FedFRASER