Farm Policies and Their Impact on Sector Composition and Risk Aversion

ABSTRACT This study examines how farm policies influence the composition and risk aversion of the farm sector using an agent‐based model based on Missouri crop farms. The analysis considers varying farmer risk aversion, payoffs from farming and other activities, and land competition. Policy scenarios include no policy, land subsidies and revenue floors. Findings indicate policies significantly affect who farms and sector‐wide risk aversion. Without policies, risk‐averse farmers exit, reducing sector‐wide risk aversion. Conversely, risk‐mitigating policies retain risk‐averse farmers, increasing sectoral risk aversion. The study further finds that altering the composition of individuals in the farm sector through risk‐reduction policies increases the demand for such policies. These results trace the risk‐reducing effects of policies from individual decisions about farm entry, expansion and exit to broader impacts on sector structure. For scientists, this highlights the need to consider sector‐level risk aversion as part of the research problem, not merely an exogenous aspect of a fixed population. For policymakers, results indicate that farm program design may affect who farms and lead to lower average risk tolerance, potentially increasing the demand for further publicly supported risk management tools.