Testing for static resource and product equilibrium under output price risk : Western Canadian agriculture, 1961-84

Abstract

This thesis provides econometric tests of the hypothesis of static competitive farm resource and output equilibrium in Western Canadian agriculture over the period 1961-84. These tests are conducted with and without risk aversion and price uncertainty. The theoretical models assumed for this sector included a cost function approach, an indirect utility framework, and a stochastic profit function model. Two different tests are conducted for the proposed hypotheses: (1) Wald chi-square tests of the symmetry restrictions implied by cost minimization and/or utility maximization and/or profit maximization and (2) Wald chi-square, Hauseman specification, and likelihood ratio tests of the first order conditions for static equilibrium for quasi-fixed inputs and outputs. The symmetry restrictions implied by cost minimization are not rejected given a short run Translog cost function for Western Canadian agriculture. Given these restrictions, static competitive equilibrium is not rejected for dairy, poultry, farm produced capital, and farm land. For farm machinery the outcome of this hypothesis depends on the econometric test conducted. For crop and livestock outputs, similar hypothesis tests are inconclusive due to the significant impact of output price risk and uncertainty on the results of these tests. Overall, static farm resource and product equilibrium is rejected for the whole agricultural sector of Western Canada over the period 1961-84.