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This study uses portfolio theory to evaluate the effects of off-farm income on the labor allocation and production decisions of American farmers. It finds that hedging with off-farm income makes markets more risky, although the effects decrease for larger farm sizes. Farmers respond to increases in off-farm income opportunities by producing more-risky crops, but they produce using a smaller percentage of available household labor. Empirically, off-farm income is significant in raising the wealth of only mid-sized farms. It appears that hedging with off-farm income effectively reduces farm households' risk exposure level, but it creates a need for new agricultural policies.


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