SERGIO H. LENCE: Research Agenda

 

My past research has mostly focused on the theme of decision making in the presence of uncertainty. Besides being central to the theory and practice of finance, the study of decision making under uncertainty is critically relevant to the U.S. agricultural sector. This is true because recent policies have given farmers much more freedom to choose among agricultural enterprises and have shifted most of the risk-bearing burden back to farmers. As well, nowadays farmers and agribusiness firms face a much larger degree of uncertainty due to many new factors, such as greater commodity price volatility, new types of financial arrangements, stricter food safety standards, and greater public concerns toward the environment.

 

Within the unifying theme of decision making under uncertainty, I published numerous articles and made significant contributions on the following specific topics:

  • Financial markets, the impact of financial markets on real decisions, and risk management.
  • Endogenous risk and self protection. Endogenous risk exists when an individual can affect the probability that an event will occur. Self protection occurs when an individual takes actions to change the probability of him/her suffering a loss.
  • Estimation risk (i.e., the uncertainty about parameters of the probability distribution of random variables such as prices).
  • The value of better information about probability distribution parameters.
  • Portfolio models applied to study the allocation of farmland among agricultural activities.

 

My research agenda has evolved from being largely focused on risk management problems towards being concerned with broader financial issues. My current research agenda includes the study of (1) asset prices; (2) credit markets; (3) preferences toward time, risk, and intertemporal substitution; (4) investment; (5) land allocation decisions using portfolio models; and (6) farm behavior using entropy methods. These research areas are discussed next.

 

Asset prices. I am interested in providing a better understanding of the behavior of farmland prices. Farmland prices are very important because they have experienced notorious boom-bust cycles with destabilizing effects for the agricultural economy and related sectors (clear proof of this assertion is the recession suffered by Iowa in the 1980s). Farmland accounts for about two thirds of the U.S. farm sector’s wealth and provides critical collateral for the financing of agriculture. Specific aspects of farmland price behavior that I am studying are:

  • Rationality. I am investigating whether farmland prices reflect "rational" expectations of future cash flows from farmland. That is, I am evaluating how good the models commonly used to appraise farmland values are.
  • Effect of transaction costs. I am assessing the likely impact that costs involved in the transfer of farmland ownership may have on the level and volatility of farmland prices.
  • Structural changes. I am studying whether the behavior of returns to farmland investments has changed over time and, if so, the possible factors behind such structural changes.
  • The extent to which prices of farmland with different quality and/or locations are linked to each other, and the extent to which farmland markets are related to financial asset markets. I am quantifying the strength of such linkages, as they provide a measure of how well farmland markets function.

In addition, I plan to address the price behavior of other important agricultural assets, such as machinery and livestock.

 

Credit markets. I am exploring the importance of credit rationing in the U.S. agricultural sector. Governments have historically provided substantial amounts of subsidized credit to agriculture based on the presumption that credit rationing was pervasive. Unfortunately, little scientific evidence of credit rationing exists, mostly because only recently have economists began to understand rationing behavior. Although I may also use more traditional economic research methods, I am currently using laboratory experiments to uncover when credit rationing may occur. Laboratory experiments are quite useful for this purpose because they allow me to control for the degree of information possessed by different market participants. This is crucial because it is now well-known that credit markets differ from other (e.g., commodity) markets, in that participants typically have asymmetric information (for example, borrowers may know how likely they are to default better than lenders).  I am also analyzing the pervasive structural changes experienced in recent years by the agricultural banking sector.

 

Preferences toward time, risk, and intertemporal substitution. Despite their relevance for understanding investment and saving behavior in the U.S. agricultural sector, no research has been done to measure the extent to which U.S. farmers discount the future (i.e., their time preferences) or the extent to which they substitute current for future consumption when interest rates change (i.e., their preferences toward intertemporal substitution). I want to fill this gap in the existing knowledge. As well, part of my current work is aimed at obtaining empirical estimates of risk aversion for the U.S. agricultural sector that are better grounded on financial theory.

 

Investment. I have developed a theoretical framework to study investments in equipment by owner-operated firms (e.g., farms) and how they are affected by credit constraints. I am currently modeling the U.S. farm sector, and a student of mine is investigating this topic using panel data for Iowa farmers. I am also developing a theoretical model to analyze and measure the impact on U.S. farmers’ welfare of transaction costs involved in buying/selling assets.

 

Portfolio models applied to land allocation decisions. I am applying financial portfolio models to study positive and normative issues regarding the allocation of land among agricultural activities. I am quantifying the extent to which diversification among agricultural enterprises is due to risk as opposed to technological constraints.

 

Application of entropy methods to study farm behavior. For most farms, data on aggregate input usage are typically available but data on activity-specific inputs are not. This limitation of the data makes it difficult to analyze farm behavior (e.g., how farmers respond to changes in prices or in technology). I am studying farm behavior using entropy methods, which are newly developed econometric techniques that allow one to deal with this kind of data limitation in an efficient manner.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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