The effects of yield variations, price expectations, risk aversion and money illusion on farm-land allocation in Punjab

This paper analyses farmers’ decisions on land allocation between the major cereals in India’s most agriculturally advanced state—Punjab. A mean-variance model of optimal land allocation, in which farmers are postulated to be risk averse, maximising expected utility from value added from growing cereals, perceiving the deviation of the farm-gate prices from the government guaranteed prices in accordance with an autoregressive process, and expecting yields’ means and variances to be proportional to the area under cultivation, is developed and estimated with panel data. Estimates of farm-land allocations determinants are obtained under a wide range of alternative assumptions about the expectation-formation mechanism and the issue of ‘money illusion’.