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Effect Of Revenue Insurance On Entry And Exit Decisions In Table Grape Production: A Real Option Approach

Listed author(s):
  • Seo, Sangtaek
  • Salin, Victoria
  • Mitchell, Paul D.
  • Leatham, David J.

This study determines the entry and exit thresholds of table grape farming with irreversible investment under uncertainty. Real option approach is adopted to consider the investment and management flexibility. Also revenue insurance is introduced to consider the effect of the risk management programs on the entry and exit thresholds. Results show that revenue insurance increases the entry and exit thresholds by 1% and 4%, respectively, thus discouraging new investment and current farming, as long as the revenue guarantee is less than the exit threshold. Revenue insurance increases the entry threshold by 3% and decreases the exit threshold by 13% as long as the revenue guarantee is greater than the exit threshold. In this case, revenue insurance discourages the investment and encourages the current farmer to stay in farming, further. However, the decrease in the subsidy rate results in the increase in both entry and exit thresholds. Thus, the premium subsidy levels should be carefully considered if the policy objective is to encourage growers to shift to higher-value crops.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2004 Annual meeting, August 1-4, Denver, CO with number 20229.

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Date of creation: 2004
Handle: RePEc:ags:aaea04:20229
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