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Title:A Projective Method for Measuring Central Illinois Farmers' Reservation Prices for Cash and Intermediate Credit Reserves
Author(s):Harris, Kim Scott
Department / Program:Agricultural Economics
Discipline:Agricultural Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Agricultural
Abstract:Prior research has demonstrated the importance of liquidity management of risk on the farm. In these studies reservation prices were found by varying parameters of functions reflecting assumed behavior of risk averse decision makers. Such a procedure, however, attenuated validation of the model containing the assumed liquidity value functions. What had been lacking was an empirical method for eliciting these risk response parameters. Such a need was the primary objective of the study reported here.
This objective involved the development and "pilot testing" of a survey instrument that permitted direct measurement of cash and intermediate credit reservations held by central Illinois farmers. The methodology developed was projective in nature: eight central Illinois farmers were presented with a hypothetical investment choice that forced them to make allocative decisions among their intermediate credit, cash on hand, and unpriced crop inventory.
Through a series of questions, the minimum required rate of return (ROR) on corn inventory was searched for that would leave the respondent indifferent between using his cash or intermediate credit reserves for the purchase of a computer and supporting software or selling his corn inventory to purchase the computer equipment. Payment alternatives could not be blended. The minimum ROR was construed as the decision maker's reservation price for the respective percentage level of cash or intermediate credit in reserve.
All respondents associated a reservation price with unused cash and intermediate credit which increased as reserved cash and inter- mediate credit diminished. With a method of obtaining reservation prices and an OLS regression routine, liquidity value functions were estimated for each respondent. An equation was fitted to reservation prices elicited during the simulated investment game, with amount of reserves as the independent variable and reservation price as the dependent variable.
Three goodness-of-fit criteria, (adjusted) (')R('2) and t-values, and visual inspection of predicted liquidity value curves, were used to determine the functional form chosen as most suitable for fitting the data. For 15 of the 16 liquidity value functions fitted the most suitable form was nonlinear and in 12 of these 15 cases the most suitable nonlinear form was quadratic.
Issue Date:1985
Description:183 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1985.
Other Identifier(s):(UMI)AAI8521782
Date Available in IDEALS:2014-12-15
Date Deposited:1985

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