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Investment in farming under uncertainty and decoupled support: a real options approach

Author

Listed:
  • Luca Di Corato

    (Department of Economics, Ca' Foscari University of Venice)

  • Dimitrios Zormpas

    (Department of Mathematics, University of Padua)

Abstract

Under the current version of the Common Agricultural Policy (CAP), payments to EU farmers are decoupled from the production of agricultural commodities. In fact, farmers qualify for CAP support as soon as their land is maintained in good agricultural and environmental condition. In this paper, we study how decoupled payments influence the decision to invest in farming. We show that decoupling is implicitly providing a costless hedge against volatile farming profits. Consequently, a higher decoupled payment leads the potential farmer to hasten its investment but also results in a farm with lower productive capacity.

Suggested Citation

  • Luca Di Corato & Dimitrios Zormpas, 2019. "Investment in farming under uncertainty and decoupled support: a real options approach," Working Papers 2019:06, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2019:06
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    References listed on IDEAS

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    More about this item

    Keywords

    Decoupling; Real Options; Land Development; Capital Intensity; Passive Farming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns

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