Mean reversion and autocorrelation in profitability of Illinois farms

Economic theory implies that firms in a competitive market will adjust to long-run equilibrium levels of profitability, resulting in mean reversion of profitability. Partial adjustment models are applied to farm-level data from Illinois to test for mean reversion and autocorrelation in profitability. Results show that farm businesses revert to individual levels of expected profitability at an annual rate of 0.5, while the annual rate of negative autocorrelation is 0.175.