The value of economic simulation experiments in analyzing changes in direct payments and Dutch dairy farmers’ strategies

This research shows the value of using economic simulation experiments in analyzing farmer behavior with respect to proposed Common Agricultural Policy changes and the provision of public goods by farmers. Explicit attention is paid to the way experimental economics complements existing neo-classical microeconomic producer theory when analyzing farm behavior. Most important differences found between neo-classical microeconomic models and the specific simulation experiment we evaluate in this study are first, neo-classical models presume cost minimization or profit maximization, whereas in the experiment this was not presumed. Second, the experiment is more flexible in context of farming strategies; in neo-classical models strategies are limited to adjusting only in- and output quantities and the simulation experiment is not. Third, in neo-classical models the production factors are assumed to be homogenous, whereas in the simulation experiment they are allowed to be heterogeneous. Fourth, the simulation experiment with farmers allows for heterogeneous price expectations, formulated by the farmers themselves whereas neo-classical models usually use uniform price expectations defined by the modeler. Finally, this assessment is useful in setting a suitable implementation of the Common Agricultural Policy in the Netherlands for the future.