Milked for All They Are Worth:
Livestock Replacement in a Dynamic Discrete Choice Model

Job Market Paper

Click here for a copy of the working paper

This paper examines animal replacement behavior for over 1,000 Wisconsin dairy farms during the period 2011-2014 and analyzes the rationale for high replacement rates. I model the replacement decision using a dynamic discrete choice model and incorporate unplanned mortality as a source of uncertainty that drives farmers to replace dairy cows before they maximize production. The empirical model incorporates cow and herd heterogeneity in mortality rates to back out the implied cost of cow mortality. Using the conditional choice probability method, I estimate the cost of mortality at 1,800 USD per death, 800 dollars more than estimates based on simulation studies. Utilizing farm size heterogeneity, I also find that mortality costs are three times higher on small dairies than on larger ones. In a counterfactual estimation, dairy farmers were willing to pay 1,300 USD to eliminate mortality risk completely for first year dairy cows. These results suggest that genetic selection in U.S. dairy favors relatively large farms and may be accelerating the exit of small farms.