Description: Department Seminar: Jared Hutchins (University of Illinois Urbana-Champaign)

Location: 368A Heady Hall

Title: "Heterogeneous Asset Replacement with Failure Costs: An Empirical Model of Livestock Replacement"

Abstract: Unanticipated asset failure can cause firms to replace assets early in their lifespan to avoid the costs from an asset breaking down in the middle of production. Using a dynamic discrete choice model, I examine whether the costs from unanticipated asset failure explain replacement behavior on Wisconsin dairy farms where cows are replaced at an earlier age than what is predicted to be profitable. I improve on previous approaches by incorporating permanent, unobserved heterogeneity at the asset level with animal-level fixed effects and improving prediction of conditional choice probabilities with the random forest algorithm. Using data from over 1,000 Wisconsin dairy farms, I estimate the cost of asset failure at 2,300 USD per death, more than twice what simulations assume when calculating the optimal replacement rule for dairy farms. Having undervalued the costs of animal health, firms in dairy may actually benefit from prioritizing asset durability over productivity.

Contact Person: Donghyuk Kim