FARM HOUSEHOLD PRODUCTION IN THE PRESENCE OF RESTRICTIONS ON DEBT - THEORY AND POLICY IMPLICATIONS

In this paper a two period life cycle model of the farm household is c onstructed allowing for production and restrictions on debt in which t he consumption and production decisions of the farm household are simu ltaneous. It is shown that the farm household's production responses t o exogenous changes may be qualitatively different to that predicted b y the profit-maximising model when all markets are perfect. In particu lar, when the household is debt constrained, 'perverse' output effects are possible with output increasing in response to output price decre ases. Further, for such households, compensation payments will have pr oduction effects. Finally, the financial situation of the farm has an impact on production for debt constrained farms.