Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture
This paper studies optimal investment and the dynamic cost of income uncertainty, applying a stochastic programming approach. The motivation is given by a case study in Finnish agriculture. The investment decision of a representative farm is modelled as a Markov decision process, extended to account for risk. A numerical framework for studying the dynamic uncertainty cost is presented, modifying the classical expected value of perfect information to a dynamic setting. The uncertainty cost depends on the volatility of income: e.g. with stationary income, the dynamic uncertainty cost corresponds to a dynamic option value of postponing investment. The model can be applied to agricultural policy planning. In the case study, the investment decision is sensitive to risk.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tauer, Loren W., 2006.
"When to Get In and Out of Dairy Farming: A Real Option Analysis,"
2006 Annual meeting, July 23-26, Long Beach, CA
21251, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Tauer, Loren W., 2006. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 35(2), October.
- Loren Tauer, 2005. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Finance 0504018, EconWPA.
- Tauer, Loren W., 2004. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Working Papers 127151, Cornell University, Department of Applied Economics and Management.
- Amegbeto, Koffi N. & Featherstone, Allen M., 1992. "Risk Costs And The Choice Of Market Return Index," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
- Karl Claxton, 1999. "Bayesian approaches to the value of information: implications for the regulation of new pharmaceuticals," Health Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 269-274.
- Keswani, Aneel & Shackleton, Mark B., 2006. "How real option disinvestment flexibility augments project NPV," European Journal of Operational Research, Elsevier, vol. 168(1), pages 240-252, January.
- Hong Bo & Robert Lensin, 2005. "Is the Investment-Uncertainty Relationship Nonlinear? An Empirical Analysis for the Netherlands," Economica, London School of Economics and Political Science, vol. 72(286), pages 307-331, 05.
- Carl Johan Lagerkvist, 2005. "Agricultural policy uncertainty and farm level adjustments--the case of direct payments and incentives for farmland investment," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 32(1), pages 1-23, March.
- Aizenman, Joshua, 1998.
"New Activities, the Welfare Cost of Uncertainty and Investment Policies,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 3(2), pages 97-110, April.
- Joshua Aizenman, 1996. "New Activities, the Welfare Cost of Uncertainty and Investment Policies," NBER Working Papers 5825, National Bureau of Economic Research, Inc.
- Heikkinen, T. & Pietola, K., 2009.
"Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture,"
European Journal of Operational Research,
Elsevier, vol. 192(2), pages 634-646, January.
- Heikkinen, Tiina & Pietola, Kyosti, 2006. "Investment and the Dynamic Cost of Income Uncertainty: the Case of Diminishing Expectations in Agriculture," Discussion Papers 11868, MTT Agrifood Research Finland.
- Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2003.
"Strategic Investment Under Uncertainty : Merging Real Options with Game Theory,"
2003-6, Tilburg University, Center for Economic Research.
- Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2004. "Strategic investment under uncertainty : Merging real options with game theory," Other publications TiSEM 57b69510-cf54-479e-938e-d, Tilburg University, School of Economics and Management.
- Luis Alvarez & Rune Stenbacka, 2003. "Optimal risk adoption: a real options approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(1), pages 123-147, December.
- Vercammen, James, 2003. "A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment," Working Papers 15847, University of British Columbia, Food and Resource Economics.
- Keith C. Knapp & Lars J. Olson, 1996. "Dynamic Resource Management: Intertemporal Substitution and Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1004-1014.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:192:y:2009:i:2:p:634-646. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.