Continued Existence of Cows Disproves Central Tenets of Capitalism?

Abstract

Notes: Center discussion papers are preliminary materials circulated to stimulate discussion and critical comments. This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=2321168. Continued Existence of Cows Disproves Central Tenets of Capitalism? "In theory, the market should have done away with Edible Arrangements long ago," said American Economic Association president Orley Ashenfelter, who added that one of the crucial assumptions of capitalism is the idea that businesses producing undesired goods or services will fail. "That's how it's supposed to work".

Do Cows Have Negative Returns? The Evidence Revisited

“…The almost 'romantic view' about the profitability of cows has recently been shaken by a paper of Anagol et al (2013). In that paper, the authors estimate that the annual average return to owning a dairy animal in Northern rural India (Uttar Pradesh) is negative by 64% (not including the opportunity cost of capital).…”

“…Anagol et al (2013) conclude that households holding ownership of cattle cannot be explained by fully rational economic behavior and put forward a number of potential alternative explanations: better quality of home produced milk, preference for illiquid savings and the social and religious value of cows. Attanasio and Augsburg (2014) have very recently revisited the issue and argue that variation in returns with weather conditions is more likely to explain why Anagol et al (2013) find negative average returns. The authors show that Anagol et al (2013) collected data during a drought period in which fodder was scarce and fodder prices high.…”

“…Attanasio and Augsburg (2014) have very recently revisited the issue and argue that variation in returns with weather conditions is more likely to explain why Anagol et al (2013) find negative average returns. The authors show that Anagol et al (2013) collected data during a drought period in which fodder was scarce and fodder prices high. They recalculate returns using three rounds of data in a different state of India (Andhra Pradesh) and find positive average returns in good years (in terms of rainfall) and negative returns in bad years.…”

“…We also use data from Andhra Pradesh but from alternative years. On one hand we want to see how generalizable the findings by Anagol et al (2013) as well as Attanasio and Augsburg (2014) are and on the other hand -and more importantly -we complement the accounting approach proposed by Anagol et al (2013) which basically serves to calculate the average profitability of holding cows, with an analysis of the marginal profitability. Whereas average profitability just informs whether it is economically beneficial to hold a certain quantity or value of cows, estimating the marginal profitability allows deriving the benefit of an additional dollar invested in cows and shows how the profitability evolves with the value already invested.…”

“…Marginal returns are thus an important parameter for households that have to decide whether to invest further in cows or rather in something else. In contrast to Anagol et al (2013) and Attanasio and Augsburg (2014), we also address endogeneity issues that can potentially bias estimates of average and marginal returns. To this end we rely on panel data and employ an instrumental variables (IV) approach, where we instrument the value of cattle owned with the exposure to the National Rural Employment Guarantee Act (NREGA).…”