The analysis of irreversibility, uncertainty and dynamic technical inefficiency on the investment decision in Spanish olive sector
AbstractThe purpose of this paper is the evaluation of the investment decision under uncertainty and irreversibility allowing for long run inefficiency. The analysis has been applied to a 158 Spanish olive farms using FADN data set. A real option approach has been used to analyse the decision to invest under uncertainty and irreversibility, and a dynamic stochastic frontier model has been developed to estimate the long run technical efficiency and it persistence. The results show that the technical inefficiency persistence parameter is fairly low to unity, which means that small technical inefficiency is transmitted to the next time period. The olive groves investment is irreversible and characterized by uncertainty on price and discount rate. An increase of discount rate means that the farmers take the decision to postpone investment. An increase on price along with a decrease of discount rate leads to the decision to invest with no option value of waiting to invest. The results also suggest that the decision of investment depend on technical inefficiency ant it persistence, the inefficient farmers take time and wait to invest, while at small persistence parameter the decision is to invest.
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Bibliographic InfoPaper provided by International Association of Agricultural Economists in its series 2009 Conference, August 16-22, 2009, Beijing, China with number 51397.
Date of creation: 2009
Date of revision:
Olive; dynamic efficiency; real option; Production Economics; Q12;
Find related papers by JEL classification:
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
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