Rural Investment and the Cost of Income Uncertainty
AbstractThis paper studies optimal investment decision in agriculture under diminishing income expectations. The goal is to study the cost of income uncertainty and its implications to the efficiency of investment subsidies. Investment decision is modelled as a Markov decision process, extended to account for risk. Applying a stochastic programming approach, the cost of imperfect information is evaluated as the difference between the profitability of investment under stable income and under uncertain income. Computational experiments demonstrate that the cost of imperfect information can be high, deteriorating the efficiency of investment subsidies. Also, examples suggest that the optimal timing of the investment can be sensitive to risk.
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Bibliographic InfoPaper provided by European Regional Science Association in its series ERSA conference papers with number ersa06p51.
Date of creation: Aug 2006
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