Zilberman, David

English

Research Papers in Economics

Dynamic Supply Response and Agricultural
Investment: Discussion
David ZiIberman
The papers of Chambers and Lopez, Karp and
Shumway, and Weaver and Stephano are very
interesting and cover a wide range of impor-
tant issues associated with empirical modeling
of dynamic supply response.
Karp and Shumway present a good review
of the “mainstream” approach to dynamic
supply modeling. Most of the models that they
review are based on the assumption that deci-
sion makers are optimizers and derive suppIy
responses from the solution to optimization
problems. The difference in the derived supply
relationships reflect differences in expecta-
tions or degree of uncertain y. This survey
demonstrates that the dilemmas and trade-offs
associated with modeling supply in static envi-
ronments are carried over and significantly
magnified when dynamic considerations are
introduced. One important trade-off is be-
tween tractabilityy and realism. This trade-off
leads to the partition of the dynamic models
into two groups: (1) deterministic dynamic
models which assume complicated price ex-
pectation and learning considerations to ob-
tain neat, tractable relationships and (2)
“real” dynamic models with complex expec-
tation structures and update and feedback
rules.
It seems that the state of the art is set for
mass application of deterministic dynamic
supply model and, in particular, the dynamic
duality approach. Much more research and
development and educational effort are re-
quired for widespread empirical use of real
dynamic models. But the limitations of the
deterministic dynamic models, which will be
discussed later, seem to make these efforts
worthwhile.
The second trade-off alluded to by Karp and
Shumway is between prediction and estima-
tion of structural parameters. Mechanistic
models following, say, the Box-Jenkins ap-
Oiannirri Foundation Paper No. 724(for identification only). Asso-
ciate Professor of Agricultural and Resource Economics, Univer-
sity of California, Berkeley.
preach, seem to be more effective in the first
task while estimation of structural parameters
requires more rigorous theoretical foundation.
Thus, my lesson from the Karp-Shumway
paper is that the profession will do better by
diversifying its effort in modeling dynamic
supply response among several approaches;
and the superior methodologies will be dis-
covered as more information is accumulated.
Chambers and Lopez presented a long
paper on the most popular approach to dy-
namic supply analysis-dynamic duality. It
seems that, after duality has conquered the
static arena, it proceeds to take over the dy-
namics; and while viewing it, I feel like a resis-
tance fighter. Obviously, duality is an impor-
tant, insightful, and useful concept; it has led
to significant outcomes, but it is limited. It is
very useful with specific data structures with
abundant information on prices and scarcity of
information on quantities; but, as Just, Zil-
berman, and Hochman demonstrated for static
cases, duality-based relationships become in-
ferior as data availability improves. Another
drawback of the duality relationships is the
strict and limited assumption that they are
based upon. Even in the static case, the tech-
nological interpretations of the coefficients of
duality relationships are breaking down as one
introduces yield and price uncertainties, tech-
nological heterogeneity y among producers, etc.
Most importantly, duality is an economic con-
cept whose interpretation and use may not be
easily shared with members of other disci-
plines. Thus, its usefulness may be quite lim-
ited for policy purposes when interdisciplinary
cooperation is needed and when policy makers
desire to understand intuitively the foundation
of the models whose results they use.
The dynamic duality models have the lim-
itations of the static models and some addi-
tional flaws of their own—in particular, they
assume static or very simple dynamic price
expectations. Thus, one of the most important
aspects of dynamic decision making, namely
the guessing of the future, is ignored. More-180 October 1984
over, one of the key components of the models
presented by Chambers and Lopez is transac-
tion cost. This concept, however, seems to be
a reduced-form concept dressed in structural
clothes. It is a “fudge factor” which does not
give the full story behind it. True, models that
use it are superior to models which assume
perfect adjustment; but, for decision pur-
poses, one needs to know what are the causes
of rigidities rather than that they exist, Never-
theless, with all their limitations, dynamic du-
ality may present an important stepping stone
in the development of reliable and practical
modeling of dynamic supply response; and
Chambers and Lopez captured the essence
and generalized this approach with much in-
sight. Moreover, their explicit treatment of the
impacts of the credit constraints on output
supply and input demands make an important
original contribution.
Weaver and Stephano argue that behavioral
rules are derived from the assumption that
profit maximization may be erroneous espe-
cially in a dynamic setting. Their argument is
consistent with the behaviorist approach of
Simon. It is also consistent with T. W.
Schultz’s view that, only in very static econ-
omies, resource allocations follow what is
subscribed by profit maximization, When
technological change is rapid, resource alloca-
tions are suboptimal; and the actual behavior
deviates systematically from the subscription
of profit maximization. Thus, to improve the
accuracy of the empirical dynamic supply
models, there must be conformity to a more
realistic view of farmer’s behavior. Such im-
proved models may be derived by interdisci-
NJARE
plinary cooperation between economists and
scholars from other behavioral disciplines
(such as psychology).
In summary, dynamic models of supply are
still in their infancy. There are several promis-
ing avenues that they follow—each with its
limitations and problems. The profession
should encourage the development of most of
these alternatives with the belief that, over
time, the fittest will survive.
References
Chambers, Robert G., and Ramon E. Lopez, ‘‘Modeling
Dynamic Supply Response in Agriculture,” Paper
presented at the American Agricultural Economics
Association Annual Meeting, August 1984.
Just, Richard E., David Zilberman, and Eithan Hochman,
“Estimation of Mrdticrop Production Function s,”
American Journal of Agricultural Economics 65;4
(1983):770-780.
Karp, Larry S,, and Richard Shumway, “Issues and
Methods in the Estimation of Adjustment Costs, ”
Paper presented at the American Agricultural Eco-
nomics Association Annual Meeting, August 1984.
Schultz, Theodore E., “The Value of the Ability to Deal
with Disequilibrium, ” Journal of’ Economic Liferu-
fure (1975):827–846,
Simon, Herbert A., Models of Man: Social ond National;
Mathematical Essays on Rational Human Behavior
in a Socia/ Setting, New York: John Wiley & Sons,
Inc., 1957.
Weaver, Robert D., and Spiro Stephano, “Toward a f3e-
havioral Approach to Modeling: Dynamic Production
Choice Structures, ” Paper presented at the American
Agricultural Economics Association Annual Meeting,
August 1984,

Issues and Methods in the Estimation of Adjustment Costs, ” Paper presented at the American Agricultural Economics Association Annual Meeting,

Modeling Dynamic Supply Response in Agriculture,” Paper presented at the American Agricultural Economics Association Annual Meeting,

The Value of the Ability to Deal with Disequilibrium,

Toward a f3ehavioral Approach to Modeling: Dynamic Production Choice Structures, ” Paper presented at the American Agricultural Economics Association Annual Meeting,

DYNAMIC SUPPLY RESPONSE AND AGRICULTURAL INVESTMENT: DISCUSSION

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