Asset fixity under state-contingent production uncertainty

Abstract

Asset fixity of inputs is tested under state-contingent production uncertainty. We construct a general dynamic dual model for U.S. agriculture that allows tests for full variability and strict fixity to be performed for each input as well as tests for functional form. We estimate the model using a generalised Box-Cox functional form. Most test results are robust to functional form, but test results of fixity are sensitive for two of four inputs. The generalised Leontief is found to be significantly preferred to the translog and normalised quadratic functional forms for the dynamic model. With this functional form, family labour exhibits strict fixity, while land, capital and hired labour exhibit quasi-fixity. The estimated adjustment rates for the three quasi-fixed inputs are 15, 27 and 47 per cent. Production uncertainty has limited impacts on aggregate investment decisions for quasi-fixed inputs. The insignificant elasticity between state-contingent outputs suggests that an ex post analysis conditional on the realised states of nature is appropriate.