Effects of decoupling on the mean and variability of output

Abstract

The influence of inputs on output risk in the context of agricultural production decisions taken by non-risk neutral agents has been ignored by previous research assessing the effects of decoupled income support payments in a deterministic world or risk-neutral framework. We study the impacts of decoupled payments on input use and on output mean and variance. Our theoretical framework for studying agricultural producers' responses to lump sum payments allows for both output and price uncertainty and economic agents' risk attitudes. Results show the importance, in a non-risk neutral scenario, of considering the influence that economic agents have on the stochastic component of output through input use. Our empirical application uses Kansas farm-level data to illustrate the model.