Farmers' Investment Behavior: An Empirical Assessment of Two Specifications of Expectations

The capital investment decision is modeled and two different assumptions about expectations are compared and tested using panel data for Dutch dairy farms. The utilization of panel data allowed to account for the possibility that the intercept in the function for capital varies over the farms. The models are estimated using the generalized method of moments (GMM) for dynamic panel data. The model based on static expectations fits the data well. The results obtained from the rational expectations model are not consistent with the theory.