Modeling Nonlinearities in Agricultural Factor Markets

Three essays are presented to re-examine some of the more commonly-asked economic questions regarding agricultural factor markets in the U.S by accounting for potential nonlinearities in the underlying economic relationships that are commonly represented in a linear fashion in the empirical literature.;The objective of the first essay is to examine the potential for nonlinearities in the underlying relationships represented by a standard translog system of factor demand equations. This is accomplished by estimating a two-regime threshold system of factor demand equations for nondurables manufacturing industries in the U.S. The empirical findings based on data for U.S. nondurable manufacturing industries reveal that there is strong evidence of significant threshold effects in the factor demand relationships in most nondurable goods sectors. Incorporating thresholds in the factor demand relationships holds promise for explaining the small elasticities typically found in the previous studies of factor demand relationships.;In the second essay, time-series methods based on panel data are used to increase the power of conventional econometric tests of present value models commonly applied to studies of asset valuation. A second contribution is to allow for the presence of frictions in farmland markets by allowing for threshold nonlinearities in the empirical model. Using county-level data on Iowa farmland prices and cash rental rates between 1987 and 2010, panel data unit root models that allow for switching-regimes provide evidence in favor of the present value models. In one regime, where a threshold in the spread between rents and values is yet to be reached, deviations are persistent and contribute to drive land prices away from their intrinsic values. Conversely, the other regime is characterized by strong mean reversion in which market valuation becomes closer to fundamental determinants of values.;In the third essay, the subject of out-farm migration of farm labor is studied. The core of the literature on inter-sectoral labor migration is based on net present value models of investment in which individuals are assumed to migrate in order to take advantage of positive wage differentials. The empirical evidence shows that the estimated response of migration to wage differentials is usually small. It is argued, in this essay, that a real options approach might provide a basis for explaining commonly observed small elasticities. Given irreversibility of migration decisions and uncertainty in the economy, potential migrants might choose to postpone their migration decisions. Using annual employment data between 1948 and 2009, results indicate that larger elasticities between economic incentives and out-farm migration are observable after a threshold of wage differentials between farm and off-farm sectors is reached.