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Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging

Published online by Cambridge University Press:  26 January 2015

Jeffrey H. Dorfman  and
Berna Karali
Jeffrey H. Dorfman
Affiliation:
Department of Agricultural and Applied Economics, The University of Georgia, Athens, GA
Berna Karali
Affiliation:
Department of Agricultural and Applied Economics, The University of Georgia, Athens, GA
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Abstract

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 4 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, modeling farmer-level heterogeneity in the examination of habit and hedging is crucial.

Keywords

Bayesian econometricshabit formationhedging decisionsinformation sourcesC11Q12Q14
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 42 , Issue 4 , November 2010 , pp. 791 - 803
Copyright
Copyright © Southern Agricultural Economics Association 2010

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