Forecasting profitability

Arbeitspapier

We use newly-available Indian panel data to estimate how the returns to planting-stage investments vary by rainfall realizations. We show that the forecasts significantly affect farmer investment decisions and that these responses account for a substantial fraction of the inter-annual variability in planting-stage investments, that the skill of the forecasts varies across areas of India, and that farmers respond more strongly to the forecast where there is more forecast skill and not at all when there is no skill. We show, using an IV strategy in which the Indian government forecast of monsoon rainfall serves as the main instrument, that the return to agricultural investment depends substantially on the conditions under which it is estimated. Using the full rainfall distribution and our profit function estimates, we find that Indian farmers on average under-invest, by a factor of three, when we compare actual levels of investments to the optimal investment level that maximizes expected profits. Farmers who use skilled forecasts have increased average profit levels but also have more variable profits compared with farmers without access to forecasts. Even modest improvements in forecast skill would substantially increase average profits.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economic Growth Center Discussion Paper ; No. 1029

Classification and Topics

• Classification: Wirtschaft ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Criteria for Decision-Making under Risk and Uncertainty ; Microeconomic Analyses of Economic Development ; Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products ; Industrialization; Manufacturing and Service Industries; Choice of Technology ; Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: agriculture ; forecasting ; investment ; Wetter ; Prognose ; Pflanzenbau ; Rentabilität ; Landwirtschaft ; Investitionsentscheidung ; Theorie ; Schätzung ; Indien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Rosenzweig, Mark ; Udry, Chris
• Event: Veröffentlichung
• (who): Yale University, Economic Growth Center
• (where): New Haven, CT
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/98200
• Last update: 10.03.2025, 11:42 AM CET