Supply Response under Risk: Implications for Counter-Cyclical Payments' Production Impact

This study investigates the role of risk in farmers' acreage decisions for major field crops in the North Central region by revisiting an earlier study by Chavas and Holt. The empirical model is forward-looking and reflects better variable measurement. We test the effects of wealth and revenue risk on supply response. Estimated results are also used to examine the production impact of counter-cyclical payments (CCPs). We find that the effects of risk on supply response are not strong. An increase in initial wealth would lead to greater crop acreage, consistent with decreasing absolute risk aversion. The effect of CCPs on production appears to be negligible.