Price-endogenous technology, producer welfare, and ex ante impact assessment: The case of industrial hemp

Abstract

The emerging hemp industry is an example of an important class of agricultural products where the market extent is limited, in hemp's case by laws and regulations, causing technology adoption to interact through prices with market-level equilibrium. In this paper, we show that the equilibrium adoption rate and producer welfare impact of new technology, such as improved hemp genetics and management, are determined by the interaction between market prices and the spatial distribution of returns of both current and new technologies in the farm population. Price changes affect adoption and welfare through shifts in both the location (mean) and dispersion (variance and higher moments) of the spatial distribution of gains to the new technology. We show that an output price change may either increase or decrease the adoption rate of a new technology and in turn impact the elasticity of the market supply function. Additionally, we derive market-equilibrium measures of welfare change for both adopters and non-adopters and show how these welfare measures are affected by the spatial distribution of returns to a new technology. Our finding suggests that the interplay between new technologies and price changes is likely to have empirically important effects on regional supply and farm welfare.