Expenditure Constraints and Profit Maximization in U.S. Agriculture

Abstract This paper considers the effect of expenditure constraints on producer profit maximization. A theory of expenditure‐constrained profit maximization that provides restrictions for testing the competing null hypotheses of unconstrained and expenditure‐constrained profit maximization is developed. The resulting model is fitted to aggregate U.S. agricultural data. The hypothesis of unconstrained profit maximization is rejected, while expenditure‐constrained profit maximization cannot be rejected for U.S. agriculture. U.S. farmers apparently experience binding constraints in financing their variable production costs.