Simulating Farmers’ Decision-Making with a Cobb-Douglass MAUF: An Application for an Ex-Ante Policy Analysis of Water Pricing

Abstract

Classical economic theory relies on the assumption that farmers’ behavior can be modeled by maximizing profits or any utility function with profits as a single attribute. However, farmers’ decision-making processes are actually driven by various typically conflicting criteria, in addition to the expected profit. Therefore, it must be assumed that producers’ behavior is guided by the maximization of a multi-attribute utility function (MAUF) in which all relevant attributes considered for decision-making are condensed. The objective of this paper is to provide more in-depth knowledge about simulating farmers’ behavior by using non-linear MAUFs, developing a new non-interactive method to elicit Cobb-Douglas MAUFs based on farmers’ actual behavior that overcomes some shortcomings of traditional additive MAUFs. Moreover, this approach is compared with two others that are widely used: the profit maximization and additive MAUF approaches. This procedure is implemented for illustrative purposes to analyze the feasible impacts of water pricing in an irrigated district in southern Spain. The results obtained show that simulations using the Cobb-Douglas utility function are more reliable than the alternatives already used in the literature. In this regard, two pieces of evidence justify this assessment: the calibration is more precise, and the resulting water-demand curve is smoother than in the other two alternative simulation approaches considered.