Comparative statics and the evaluation of agricultural development programs
Creators: name: Coyle, Barry Thomas
Publisher: name: University of British Columbia
Year: 2010

description: Perhaps the most important task of any economic analysis of agricultural policy is to estimate the effects of policy on various economic measures such as income and output. This is usually done by combining economic theory with data. However, the economic theory seldom is fully descriptive of the situation and the empirical knowledge generally is far from complete. Thus, even aside from difficulties in aggregating gains and losses over individuals, economic analyses of policies are often unsatisfactory. The major purpose of this thesis is to extend economic theory and methods so as to be more descriptive of various agricultural policy situations and to make more appropriate use of available empirical knowledge. This leads us to relax some assumptions in the standard theory of the firm that often seem inappropriate, and to propose a potentially more effective method of incorporating available empirical knowledge of farm structure into economic analysis of policy. In addition, we also attempt to verify the appropriateness of other theoretical constructs of fundamental importance. First, the static theory of the firm is extended to the case of variable factor prices, i.e., factor prices endogenous to the firm. Under these more general conditions, we establish (among other things) (1) the relation between measures of surplus in factor markets and of consumer plus producer surplus, and (2) relations between the slope of a firm's derived demands schedule and various properties of its production function. It is shown that (2) provides additional support for the well-known fact that traditional qualitative comparative static methods can seldom be useful in economic policy-making. Second, we introduce a method of "quantitative comparative statics" that in principle overcomes this defect of established comparative static analysis. This methodology incorporates the available degree of empirical knowledge of the firm's structure without imposing further specification of structure (in contrast to, e.g., the traditional linear and nonlinear programming models of the firm, where a full structure must be specified). This degree of knowledge and its relations to comparative static effects of interest can be expressed as a set of quadratic equalities and inequalities. Then the range of quantitative as well as qualitative effects of policy that are consistent with our degree of knowledge of farm structure and the assumption of static optimizing behavior can in principle be calculated by nonlinear programming methods. Third, we consider the issue of the appropriateness of constructs of static optimizing behavior in predicting farm response to policy. We demonstrate that, by estimating an equilibrium shadow price for an input rather than (e.g.) supply response, one can reduce the significance of many of the problems associated with studies of supply response via representative farm models and investigate this issue more clearly. In this manner, we derive empirical support for the use of the construct of static optimizing behavior in predicting the effects of agricultural policy.