Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging
Posted: 23 Oct 2008 Last revised: 20 Mar 2010
Date Written: March 18, 2010
Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for four years on four crops we examine the role of habit, demographics, farm characteristics, and information sources on the hedging decisions made by 57 different farmers. We find that the role of habit varies widely and that estimation of a single habit effect suffers from aggregation bias. Thus, modelling farmer-level heterogeneity in the examination of habit and hedging is crucial.
Keywords: Bayesian econometrics, habit formation, hedging decisions, information sources
JEL Classification: C11, Q12, Q14
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