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Abstract

Recent models assessing the market impacts of Common Agricultural Policy (CAP) reforms are mostly static, non-stochastic and do not account for the risk attitude of farmers. This paper is a first attempt to fill this gap. We develop a stochastic version of GTAP-AGR model in which we introduce exogenous productivity shocks and farmers’ attitude towards risks. In addition to the expectation on mean price, the expectation on price volatility also becomes one of the key factors for the farmers’ decisions through its influence on risk premium. We show that under the endogenous modeling of the CAP instruments, risk aversion leads to larger production and price effects. The impacts are even larger if wealth effect is taken into consideration.

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