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The Effects of Uncertainty and Adjustment Costs on Investment in the Almond Industry

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  • Dorfman, Jeffrey H
  • Heien, Dale

Abstract

A neoclassical model of investment behavior is developed wherein firms are assumed to maximize the expected present value of net revenue under Leontief technology. Prices and yields are assumed to be stochastic. This framework yields investment as a function of the expected present value of the output from one unit of capital and the variance of the expected value. This theory is applied to investment in the almond industry. The model outperforms both a model without uncertainty and one with neither uncertainty nor adjustment costs using in-sample and out-of-sample tests. Copyright 1989 by MIT Press.

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  • Dorfman, Jeffrey H & Heien, Dale, 1989. "The Effects of Uncertainty and Adjustment Costs on Investment in the Almond Industry," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 263-274, May.
    • Handle: RePEc:tpr:restat:v:71:y:1989:i:2:p:263-74
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    Cited by:

    1. Sabien Dobbelaere & Roland Iwan Luttens & Bettina Peters, 2008. "Starting an R&D Project under Uncertainty," DRUID Working Papers 08-09, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    2. Zhao, Xin & Brady, Michael P. & Tozer, Peter R., 2015. "Do Farmers Really Plant Apples for Their Income and Cherries for Their Retirement? The Effects of Risk, Scope and Scale on Orchard Land Allocation," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205663, Agricultural and Applied Economics Association.
    3. Dale M. Heien & Tzy-Ning Chen & Yu-Lan Chien & Alberto Garrido, 1996. "Empirical models of meat demand: How do they fit out of sample?," Agribusiness, John Wiley & Sons, Ltd., vol. 12(1), pages 51-66.
    4. Twine, Edgar E. & Kiiza, Barnabas & Bashaasha, Bernard, 2015. "The Flexible Accelerator Model of Investment: An Application to Ugandan Tea- Processing Firms," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 10(1), pages 1-15, March.
    5. Li, Jia & Bluemling, Bettina & Mol, Arthur P. J. & Herzfeld, Thomas, 2014. "Stagnating Jatropha Biofuel Development in Southwest China: An Institutional Approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 6(6), pages 3192-3212.
    6. Alston, Julian M. & Fuller, Kate B. & Kaplan, Jonathan D. & Tumber, Kabir P., 2013. "Economic Consequences of Pierce’s Disease and Related Policy in the California Winegrape Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(2), pages 1-29, August.
    7. Roosen, Jutta & Hennessy, David A., 2001. "An Equilibrium Analysis Of Antibiotics Use And Replanting Decisions In Apple Production," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(2), pages 1-15, December.
    8. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute.
    9. Brady, Michael P. & Marsh, Thomas L., 2013. "Do Changes in Orchard Supply Occur at the Intensive or Extensive Margin of the Landowner?," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150452, Agricultural and Applied Economics Association.
    10. Eli Feinerman & Yacov Tsur, 2014. "Perennial crops under stochastic water supply," Agricultural Economics, International Association of Agricultural Economists, vol. 45(6), pages 757-766, November.
    11. Devadoss, Stephen & Luckstead, Jeff, 2010. "An analysis of apple supply response," International Journal of Production Economics, Elsevier, vol. 124(1), pages 265-271, March.

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