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Economic Hysteresis in Variety Selection

Author

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  • Richards, Timothy J.
  • Green, Gareth P.

Abstract

Investing in a new perennial crop variety involves an irreversible commitment of capital and generates an uncertain return stream. As a result, the decision to adopt a new variety includes a significant real option value. Waiting for returns to rise above this real option causes a delay in adoption because of economic hysteresis. This study tests for hysteresis in the adoption of wine grape varieties using a sample of district-level data from the state of California. The empirical results show a significant hysteretic effect in wine grape investment, which might be reduced by activities that smooth earnings over time.

Suggested Citation

  • Richards, Timothy J. & Green, Gareth P., 2003. "Economic Hysteresis in Variety Selection," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(01), April.
  • Handle: RePEc:ags:joaaec:37310
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    Cited by:

    1. Maart, Syster Christin & Musshoff, Oliver & Odening, Martin & Schade, Christian, 2011. "Closing down the Farm: An Experimental Analysis of Disinvestment Timing," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114375, European Association of Agricultural Economists.
    2. Ihli, Hanna Julia & Maart, Syster Christin & Musshoff, Oliver, 2012. "Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124532, Agricultural and Applied Economics Association.
    3. repec:ags:aaea13:150610 is not listed on IDEAS
    4. Ihli, Hanna Julia & Musshoff, Oliver, 2013. "Understanding the Investment Behavior of Ugandan Smallholder Farmers: An Experimental Analysis," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150331, Agricultural and Applied Economics Association.
    5. Sangcheol Song, 2014. "Entry mode irreversibility, host market uncertainty, and foreign subsidiary exits," Asia Pacific Journal of Management, Springer, vol. 31(2), pages 455-471, June.
    6. Delbridge, Timothy A., 2013. "Threshold Effects in Transition to Organic Dairy Production," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150554, Agricultural and Applied Economics Association.
    7. Giuliano Curatola & Michael Donadelli & Patrick Grüning & Christoph Meinerding, 2016. "Investment-Specific Shocks, Business Cycles, and Asset Prices," Bank of Lithuania Working Paper Series 36, Bank of Lithuania.
    8. Timothy R. Davis & Fredoun Z. Ahmadi-Esfahani & Susana Iranzo, 2008. "Demand under product differentiation: an empirical analysis of the US wine market ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 401-417, December.
    9. Maart, Syster Christin & Musshoff, Oliver & Odening, Martin & Schade, Christian, 2010. "Zum Desinvestitionsverhalten Landwirtschaftlicher Unternehmer: Ergebnisse Einer Experimentellen Untersuchung," 50st Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93943, German Association of Agricultural Economists (GEWISOLA).
    10. Davis, Timothy R. & Ahmadi-Esfahani, Fredoun Z. & Iranzo, Susana, . "Demand under product differentiation: an empirical analysis of the US wine market," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.
    11. Tadesse, Dawit & Blank, Steven C., 2003. "Cultivar Diversity: A Neglected Risk Management Strategy," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(02), August.
    12. Wesseler, Justus & Scatasta, Sara & Nillesen, Eleonora, 2007. "The maximum incremental social tolerable irreversible costs (MISTICs) and other benefits and costs of introducing transgenic maize in the EU-15," MPRA Paper 33229, University Library of Munich, Germany.
    13. Lima, Dmitry & Colson, Gregory & Karali, Berna & Guerrero, Bridget & Amosson, Stephen H. & Wetzstein, Michael, 2013. "A New Look at the Economic Evaluation of Wind Energy as an Alternative to Electric and Natural Gas-Powered Irrigation," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 45(04), November.
    14. Ayenew, Habtamu Yesigat & Sauer, Johannes & Abate-Kassa, Getachew, 2016. "Cost of Risk Exposure, Farm Disinvestment and Adaptation to Climate Uncertainties: The Case of Arable Farms in the EU," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235595, Agricultural and Applied Economics Association.
    15. Ihli, Hanna Julia & Musshoff, Oliver, 2013. "Investment Behavior of Ugandan Smallholder Farmers: An Experimental Analysis," Discussion Papers 154775, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    16. Wilson, P. & Glithero, N.J. & Ramsden, S.J., 2014. "Prospects for dedicated energy crop production and attitudes towards agricultural straw use: The case of livestock farmers," Energy Policy, Elsevier, vol. 74(C), pages 101-110.

    More about this item

    Keywords

    California; grapes; hysteresis; investment; jump diffusion; real options; variety adoption; wine; Q14; Q11; D92; C34;

    JEL classification:

    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

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