When to Get In and Out of Dairy Farming: A Real Option Analysis

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When to Get In and Out of Dairy Farming: A Real Option Analysis

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Loren Tauer

Abstract

The Dixit entry/exit real option model, modified to accommodate a milk price support regime, was applied to the entry/exit decisions of New York dairy farmers. Results varied by farm size, but for the 500-cow farm the entry milk price is $19.09 and the exit milk price is $11.66 when farmers were allowed to continuously enter and exit the industry. With no option to ever return to dairy farming, the exit milk price falls to $10.00.

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Paper provided by EconWPA in its series Finance with number 0504018.

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Date of creation: 23 Apr 2005
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Handle: RePEc:wpa:wuwpfi:0504018

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G - Financial Economics

This paper has been announced in the following NEP Reports:

NEP-AGR-2005-04-30 (Agricultural Economics)
NEP-ALL-2005-04-30 (All new papers)
NEP-CFN-2005-04-30 (Corporate Finance)

References listed on IDEAS
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Phoebe D. Engel & Jeffrey Hyde, 2003. "A Real Options Analysis of Automatic Milking Systems," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(2), pages 282-294, October. [Downloadable!]
McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June. [Downloadable!] (restricted)
Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
Other versions:
- Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November. [Downloadable!] (restricted)
Carey, Janis M & Zilberman, David, 2002. " A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 84(1), pages 171-83, February. [Downloadable!] (restricted)

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