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Dynamic Decisions under Risk: Application of Ito Stochastic Control in Agriculture

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  • Greg Hertzler

Abstract

In agricultural economics, most studies of dynamic decisions under risk have been empirical with less emphasis on theory. In finance, resource economics, and general economics, however, Ito stochastic control is popular for theoretical work. Optimal decisions can be characterized using the powerful Ito stochastic calculus. This paper describes the assumptions and methods of Ito control, constructs a dynamic model of agricultural decisions under risk, and illustrates with four examples.

Suggested Citation

  • Greg Hertzler, 1991. "Dynamic Decisions under Risk: Application of Ito Stochastic Control in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(4), pages 1126-1137.
    • Handle: RePEc:oup:ajagec:v:73:y:1991:i:4:p:1126-1137.
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    File URL: http://hdl.handle.net/10.2307/1242441
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    Cited by:

    1. Z. Bar‐Shira & R.E. Just & D. Zilberman, 1997. "Estimation of farmers' risk attitude: an econometric approach," Agricultural Economics, International Association of Agricultural Economists, vol. 17(2-3), pages 211-222, December.
    2. Blank, Steven C. & Orloff, Steve B. & Putnam, Daniel H., 2001. "Sequential Stochastic Production Decisions For A Perennial Crop: The Yield/Quality Tradeoff For Alfalfa Hay," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(1), pages 1-17, July.
    3. Brausmann, Alexandra & Bretschger, Lucas, 2018. "Economic development on a finite planet with stochastic soil degradation," European Economic Review, Elsevier, vol. 108(C), pages 1-19.
    4. Hertzler, Greg & MacAulay, T. Gordon, 2006. "Small Holders under Risk," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139791, Australian Agricultural and Resource Economics Society.
    5. Xiaoxue Du & Levan Elbakidze & Liang Lu & R. Garth Taylor, 2022. "Climate Smart Pest Management," Sustainability, MDPI, vol. 14(16), pages 1-19, August.
    6. Price, T. Jeffrey & Wetzstein, Michael E., 1999. "Irreversible Investment Decisions In Perennial Crops With Yield And Price Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(1), pages 1-13, July.
    7. West, Jason, 2018. "Optimising adaptation decisions in macadamia production using contingent claim valuation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 62(4), October.
    8. Lucas Bretschger & Alexandra Vinogradova, 2016. "Preservation of Agricultural Soils with Endogenous Stochastic Degradation," CER-ETH Economics working paper series 16/232, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    9. Lu, Liang & Elbakidze, Levan, 2012. "Application of Comparative Dynamics in Stochastic Invasive Species Management in Agricultural Production," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125226, Agricultural and Applied Economics Association.
    10. Pascale Motel-Combes, 1996. "Les déterminants de l'offre de bétail dans les pays sahéliens," Revue Économique, Programme National Persée, vol. 47(5), pages 1103-1119.
    11. Mario Ekboir, Javier, 1997. "Technical change and irreversible investment under risk," Agricultural Economics, Blackwell, vol. 16(1), pages 55-65, March.
    12. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    13. Hertzler, Greg, 1995. "Expected Utility Theory: Rest in Peace?," 1995 Conference (39th), February 14-16, 1995, Perth, Australia 148802, Australian Agricultural and Resource Economics Society.
    14. Hertzler, Greg, 2000. "The Precautionary Principle in Practice: How to Write a Call Option on the Environment," 2000 Conference (44th), January 23-25, 2000, Sydney, Australia 123660, Australian Agricultural and Resource Economics Society.
    15. MacAulay, T. Gordon & Hertzler, Greg, 2000. "Modelling Farm Households in a Spatial Context: Vietnamese Agriculture," 2000 Conference (44th), January 23-25, 2000, Sydney, Australia 123701, Australian Agricultural and Resource Economics Society.

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