An Examination of the Crop Acreage Allocation Decision Process under Uncertainty

This study seeks to determine the workings of a system of acreage allocation given price and yield uncertainty so as to identify the role that uncertainty in market output has in acreage allocation decisions. This study adapts expected utility as developed by Chavas and Holt. The major findings of this study are as follows: 1) the effect of wealth in acreage decisions depends not only on the risk preference of the farm but also on the risk in and the structure of the output market, 2) violation of symmetry can come from (i) differing expectations regarding yield and price, (ii) risk differences in the price and yield for each crop, and/or (iii) different risk preferences among farm households, 3) the non-negativity of own compensated acreage effects would be satisfied if Proposition 1 or 2 holds, 4) production decisions would be affected by price and yield risk even when all input and output prices change proportionally, in which case homogeneity would not be satisfied without Proposition 1, and 5) symmetry of expected price and yield requires additional restrictions on the ratio of expected yields and prices and responsiveness of acreage to cross yield and price.