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Policy Design as an Irreversible Investment Under Uncertainty: Norwegian Agriculture and the WTO

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  • Mittenzwei, Klaus
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    Abstract

    This paper is concerned with the timing of an agricultural policy reform under uncertainty. The focus is on the opportunity cost of giving up the option to wait when implementing a policy reform. Including the option value in applied policy analysis can help explain why conventional analyses may find observed policies to be Pareto-inferior. Furthermore, it explains why otherwise profitable policy reforms may be delayed. The theoretical model is applied to Norwegian agricultural policy anticipating a prospective WTO agreement. It is argued that the option value should be incorporated into applied policy analysis when high uncertainty prevails.

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    File URL: http://purl.umn.edu/24875
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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2002 International Congress, August 28-31, 2002, Zaragoza, Spain with number 24875.

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    Date of creation: 2002
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    Handle: RePEc:ags:eaae02:24875

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    Related research

    Keywords: Option value; Policy reform; WTO; Norway; Uncertainty; International Relations/Trade; C61; D78;

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    1. Fisher, Anthony C & Hanemann, W Michael, 1990. "Option Value: Theory and Measurement," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(2), pages 167-80.
    2. Rickertsen, Kyrre, 1998. "The demand for food and beverages in Norway," Agricultural Economics, Blackwell, Blackwell, vol. 18(1), pages 89-100, January.
    3. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, Elsevier, vol. 22(3), pages 233-259, July.
    4. Abebayehu Tegene & Keith Wiebe & Betsey Kuhn, 1999. "Irreversible Investment Under Uncertainty: Conservation Easements and the Option to Develop Agricultural Land," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 203-219.
    5. Kola, Jukka, 1993. "Efficiency of Supply Control Programmes in Income Redistribution," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 20(2), pages 183-98.
    6. Salhofer, K., 1996. "Efficient income redistribution for a small country using optimal combined instruments," Agricultural Economics, Blackwell, Blackwell, vol. 13(3), pages 191-199, February.
    7. Salhofer, K., 1996. "Efficient income redistribution for a small country using optimal combined instruments," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 13(3), February.
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