Research Accomplishment Reports 2007

Family Firms and Policy

H. Pushkarskaya
Department of Agricultural Economics

 

Project Description

The tobacco buyout legislation (November 2004) was designed to prevent (or at least decrease) the recent continuous decline in net income for U.S. tobacco growers. This decline has resulted in depressed economic conditions for tobacco farmers and their tobacco-dependent rural communities. It has been suggested that tobacco farmers in Kentucky may start new businesses as an alternative to tobacco production and that this will revitalize rural economies. In addition, Fritsch (2004) found that individuals who receive an inheritance are more likely to start new businesses. In effect, several thousand Kentucky farmers have received an "inheritance" in the form of "buy-out checks". We surveyed 703 subjects in rural Kentucky in order to analyze the effect of internal and external events and policy changes (i.e. tobacco buyout) on family businesses. We are now in the process of analyzing the data, and publishing the results.

Impact

Our analysis showed that personal characteristics, such as age, gender and level of education have a statistically significant impact on the individual's decision to start a new business. In addition, the expenditure decision seems to be affected by important recent events in life, such as major illnesses; by propensity to access diverse sources of information, e.g. custom to use the internet to accumulate the information necessary for the decision making; and by individual perception of the business climate in the community. Twenty-three percent of farmers indicated they had not decided how to spend the buyout check. This is consistent with "a defensive avoidance" bias.

From a policy perspective a possible presence of a defensive avoidance bias implies that farmers are likely to go through a period of adjustment before they switch from passive expenditure choices to new more active choices such as diversification or new business activities; moreover, since this bias seems to affect women more than men, women might need more assistance during the transition period. In addition, this natural experiment allowed us to measure the personal discount rates for Kentucky tobacco farmers, who are heterogeneous in terms of age, education, income, and other economic and non-economic factors. Results of our analysis suggest that personal characteristics, such as overconfidence, experienced interruptions in the regular family, defensive avoidance and attitude toward the sources of information, influence the personal discount rate, not the demographic profile.

Publications

Marshall, M. and H. Pushkarskaya. 2008. "An analysis of tobacco buyout farmers' expenditure choices." Journal of Agribusiness. [Under review].

Marshall, M. and H. Pushkarskaya. 2008. "Lump-Sum vs. Annuity: Analysis of Tobacco Buyout Farmers' choices." Journal of Agribusiness. [Under review].

Pushkarskaya, Helen N. and Marshall, Maria I. 2008. "Personal Discount Rates: Evidence from the Tobacco Buyout Program." The Review of Agricultural Economics. [Under review].