The Drivers of Farm Consumption and Relationship to Income: An Empirical Investigation for Illinois Farm Households Based on the Life Cycle/Permanent Income Hypothesis

Abstract:     
Empirical tests of household consumption have mixed results in regards to validity of the life cycle / permanent income hypothesis. The purpose of this paper is to analyze whether the life cycle / permanent income hypothesis is consistent with the consumption of farm households. This study uses the most recent farm level data, the Farm Business Farm Management (FBFM) data for Illinois farms from 1995 to 2009. The advantage of using the FBFM data is that it includes observations for farm households from recent years, and it is also rich in farm household expenditures while it is hard to find micro-data level household expenditure information within other datasets. Hence, more accurate conclusions for recent farm household consumption behavior are expected in this study. The paper applies a model based on the life cycle / permanent income hypothesis. By using Two Stage Least Squares (2SLS) estimation for an unbalanced panel dataset, the paper identifies the determinants of farm consumption and the relationship to income. The study provides evidence that current income changes are not significant in explaining consumption changes of farm households, thus supporting the life cycle / permanent income hypothesis for farm households. It is possible that the counter-cyclical funding sources provided to farmers by the U.S. government through farm support programs helps the farmers in their low income years. Additionally, farmers may be less credit constrained compared to non-farm households because they can use their land as collateral to obtain credit during income fluctuations and farmers may also work off the farm to make additional income during low income years.

Number of Pages in PDF File: 29

Keywords: Consumption, Income, Life cycle/permanent income hypothesis, farm households

JEL Classification: D91, E21, Q12, Q14

working papers series