Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –
In agriculture, long-term decisions are usually made in an environment which is almost completely dynamic. For example, uncertainty arises from weather and climatic conditions. (Dis)investment in irrigation technology on farms has become more prominent over the past decade. The use of irrigation has become crucial in many parts of the world as an adaptation strategy to climate change. The purpose of this study is to test whether the Real Options Approach can help to explain why farmers often choose to postpone (dis)investments that appear to be immediately profitable. We combine investment and disinvestment decisions in one experiment using a “within-subject” design and carrying out a comparative analysis between the Net Present Value approach and the Real Options Approach in order to ascertain which of the methods provides a better prediction of the investment and disinvestment behavior of farmers. In our study, we consider a simple optimal stopping (dis)investment problem in which farmers can invest in as well as abandon irrigation technology. Our results show that both theories do not explain the observed (dis)investment behavior exactly. However, some evidence was found that the Real Options Approach provides a better prediction of the (dis)investment behavior of farmers than the Net Present Value approach. Moreover, we find that farmers learn from repeated investment decision-making and consider the value of waiting over time, whereas in disinvestment situations, farmers exaggerate the option to delay. We also find that farmers demonstrate different (dis)investment behavior depending on the order in which they were faced with the investment and disinvestment treatments.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
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.:
- Sangtaek Seo & Eduardo Segarra & Paul D. Mitchell & David J. Leatham, 2008. "Irrigation technology adoption and its implication for water conservation in the Texas High Plains: a real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 38(1), pages 47-55, 01.
- Luong, Quoc & Tauer, Loren W., 2004.
"A Real Options Analysis of Coffee Planting in Vietnam,"
127152, Cornell University, Department of Applied Economics and Management.
- Quoc V. Luong & Loren W. Tauer, 2006. "A real options analysis of coffee planting in Vietnam," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 49-57, 07.
- Jeremy D. Foltz, 2004. "Entry, Exit, and Farm Size: Assessing an Experiment in Dairy Price Policy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 594-604.
- Pushkarskaya, Helen N. & Vedenov, Dmitry V., 2009. "Farming Exit Decision by Age Group: Analysis of Tobacco Buyout Impact in Kentucky," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(03), December.
- Charness, Gary & Gneezy, Uri & Kuhn, Michael A., 2012. "Experimental methods: Between-subject and within-subject design," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 1-8.
- 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.
- Khanna, Madhu & Isik, Murat & Winter-Nelson, Alex, 2000.
"Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy,"
Agricultural Economics of Agricultural Economists,
International Association of Agricultural Economists, vol. 24(1), December.
- Khanna, Madhu & Isik, Murat & Winter-Nelson, Alex, 2000. "Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy," Agricultural Economics, Blackwell, vol. 24(1), pages 9-21, December.
- Ryan Oprea & Daniel Friedman & Steven T. Anderson, 2009. "Learning to Wait: A Laboratory Investigation," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1103-1124.
- W. Viscusi & Owen Phillips & Stephan Kroll, 2011. "Risky investment decisions: How are individuals influenced by their groups?," Journal of Risk and Uncertainty, Springer, vol. 43(2), pages 81-106, October.
- Barry Smit & Mark Skinner, 2002. "Adaptation options in agriculture to climate change: a typology," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 7(1), pages 85-114, March.
- Lewellen, Wilbur G & Lease, Ronald C & Schlarbaum, Gary G, 1977. "Patterns of Investment Strategy and Behavior among Individual Investors," The Journal of Business, University of Chicago Press, vol. 50(3), pages 296-333, July.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
- Cornelis Gardebroek & Alfons G.J.M. Oude Lansink, 2004. "Farm-specific Adjustment Costs in Dutch Pig Farming," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(1), pages 3-24.
- Kenneth A. Baerenklau & Keith C. Knapp, 2007. "Dynamics of Agricultural Technology Adoption: Age Structure, Reversibility, and Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 190-201.
- Vargas Hill, Ruth, 2008. "Understanding the investment and abandonment behavior of poor households: An empirical investigation," IFPRI discussion papers 783, International Food Policy Research Institute (IFPRI).
- 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.
- Sandri, Serena & Schade, Christian & Musshoff, Oliver & Odening, Martin, 2010.
"Holding on for too long? An experimental study on inertia in entrepreneurs’ and non-entrepreneurs’ disinvestment choices,"
Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers
59518, Humboldt University Berlin, Department of Agricultural Economics.
- Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
- Rachida Justo, 2008. "Gender, family situation and the exit event: reassessing the opportunity-costs of business ownership," Working Papers Economia wp08-26, Instituto de Empresa, Area of Economic Environment.
- Price, T. Jeffrey & Wetzstein, Michael E., 1999. "Irreversible Investment Decisions In Perennial Crops With Yield And Price Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
- Timothy Cason & Daniel Friedman, 1999. "Learning in a Laboratory Market with Random Supply and Demand," Experimental Economics, Springer, vol. 2(1), pages 77-98, August.
- Janis M. Carey & David Zilberman, 2002. "A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 171-183.
- Oliver Musshoff & Norbert Hirschauer, 2008. "Adoption of organic farming in Germany and Austria: an integrative dynamic investment perspective," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 135-145, 07.
- Alex Winter-Nelson & Koffi Amegbeto, 1998. "Option Values to Conservation and Agricultural Price Policy: Application to Terrace Construction in Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(2), pages 409-418.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Pietola, Kyosti & Myers, Robert J., 1998. "Investment Under Uncertainty And Dynamic Adjustment In Finnish Pork Industry," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20953, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Martin Odening & Oliver Mu�hoff & Alfons Balmann, 2005. "Investment decisions in hog finishing: an application of the real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 47-60, 01.
- McClintock, Anthea, 2009. "Investment in irrigation technology: an application of real options analysis," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47934, Australian Agricultural and Resource Economics Society.
- John Knight & Sharada Weir & Tassew Woldehanna, 2003. "The role of education in facilitating risk-taking and innovation in agriculture," Journal of Development Studies, Taylor & Francis Journals, vol. 39(6), pages 1-22.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Andrew B. Abel & Janice C. Eberly, .
"A Unified Model of Investment Under Uncertainty,"
Rodney L. White Center for Financial Research Working Papers
14-93, Wharton School Rodney L. White Center for Financial Research.
- Jonathan P. O'Brien & Timothy B. Folta & Douglas R. Johnson, 2003. "A real options perspective on entrepreneurial entry in the face of uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(8), pages 515-533.
- Jianakoplos, Nancy Ammon & Bernasek, Alexandra, 1998. "Are Women More Risk Averse?," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 620-30, October.
- Maart, Syster Christin & Musshoff, Oliver, 2011. "Optimal Timing of Farmland Investment - An Experimental Study on Farmers' Decision Behavior -," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103693, Agricultural and Applied Economics Association.
- Murat Isik, 2004. "Incentives for Technology Adoption Under Environmental Policy Uncertainty: Implications for Green Payment Programs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 27(3), pages 247-263, March.
- Jan Hinrichs & Oliver Musshoff & Martin Odening, 2008. "Economic hysteresis in hog production," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 333-340.
- Ky�sti S. Pietola & Robert J. Myers, 2000. "Investment under Uncertainty and Dynamic Adjustment in the Finnish Pork Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 956-967.
When requesting a correction, please mention this item's handle: RePEc:ags:aaea12:124532. 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: (AgEcon Search)
If references are entirely missing, you can add them using this form.