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Lump Sum versus Annuity: Choices of Kentucky Farmers during the Tobacco Buyout Program

Published online by Cambridge University Press:  26 January 2015

Helen Pushkarskaya  and
Maria I. Marshall
Helen Pushkarskaya
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington, KY
Maria I. Marshall
Affiliation:
Department of Agricultural Economics, Purdue University, West Lafayette, IN
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Abstract

Our study uses the data collected during the implementation of the tobacco buyout program in Kentucky to evaluate how rural households, diverse in income, age, family structure, location, education level, and other characteristics, made a choice between annuities and a lump-sum payment. Subjects in our field experiment did not have to retire or change their employment, as did subjects in many field studies of the choice between annuities and lump-sum payments, which allowed us to evaluate the relationship between the option choice and a decision whether to exit the tobacco market. Our results suggest that while discounted utility theory gives acceptable predictions of the farmers' behavior, other factors have to be taken into consideration. First, there are consistent biases that describe individual intertemporal behavior, such as availability bias or acquiescence bias. Second, there is a certain degree of heterogeneity in individual intertemporal preferences that correlates with their personal characteristics, such as education and production status. Third, our analysis revealed that the decision to exit the tobacco market positively correlated with the decision to take a lump-sum payment.

Keywords

annuityfamily business systemintertemporal choicelump sumtobacco buyoutG11H31J10
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 41 , Issue 3 , December 2009 , pp. 613 - 624
Copyright
Copyright © Southern Agricultural Economics Association 2009

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