THE EFFECTS OF YIELD VARIATIONS, PRICE EXPECTATIONS, RISK AVERSION AND MONEY ILLUSION ON FARM-LAND ALLOCATION IN PUNJAB

This paper analyses farmers ’ decisions on land allocation between the major cereals in India’s most agriculturally advanced state—Punjab. A mean-variance model of optimal land allocation, in which farmers are postulated to be risk averse, maximising expected utility from value added from growing cereals, perceiving the deviation of the farm-gate prices from the government guaranteed prices in accordance with an autoregressive process, and expecting yields ’ means and variances to be proportional to the area under cultivation, is developed and estimated with panel data. Estimates of farm-land allocations determinants are obtained under a wide range of alternative assumptions about the expectation-formation mechanism and the issue of ‘money illusion’