Are Farmers Completely Rational Consumers and Do They Suffer from a Borrowing Constraint? The Dutch Case

There is some confusion in the literature on the consumption behaviour of farmers. We try to clear up some of the issues surrounding this confusion by elaborating and testing a model. Euler equations have been derived from a constant relative risk aversion utility function for total consumption expenditure, household expenditure and other expenditure, which includes durable goods. According to a test of Euler equations, farm households are not simply optimising lifetime utility. Rather, these households follow simple consumption rules, strongly influenced by habit formation. In line with most of the literature, we find that farm households are not borrowing constrained in their consumption expenditures.