Rational Expectations in Agriculture? A Review of the Issues and the Evidence

Abstract

A rapidly-growing literature on rational expectation modeling and testing is found in agricultural economics. The reviewed studies do not offer a consensus regarding the verification or falsification of the rational expectation hypothesis in agricultural markets. Small sample sizes and the low power of statistical tests in the presence of alternative expectation hypotheses contribute to the variability in conclusions. An additional and confounding source of the variability is specification searching. With a wide variabilityin specifications, divergent results are to be expected. Despite the lack of consensus, rational expectations modeling and testing has improved our knowledge of both expectation formation in agricultural markets, and the processes of agricultural market equilibrium and price determination.