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Extreme Events and Land Use Decisions under Climate Change in Tart Cherry Industry in Michigan

Listed author(s):
  • Lee, Sangjun
  • Zhao, Jinhua
  • Thornsbury, Suzanne

This paper studies a land use switching model as a measure of adaptation to climate change in tart cherry industry in Michigan. In order to capture the effects of extreme events, we employ a real options land conversion model where an underlying stochastic process allows a Poisson-type jump component. We compare land use decisions under the increased frequency and severity of extreme weather events as well as well-known gradual climate change. We find that when decision makers are allowed to optimize dynamically and to learn, gradual changes and extreme events can lead to different likelihoods of adaptation occurring as well as different adaptation incentives even when traditional net present value (NPV) calculations are equal. We suggest that although gradual change imposes higher incentive to switch than the extreme events, the realized action may be dominated by the extreme events, especially extreme magnitude change.

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Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 150568.

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Date of creation: 2013
Handle: RePEc:ags:aaea13:150568
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  1. Ernesto Mordecki, 2002. "Optimal stopping and perpetual options for Lévy processes," Finance and Stochastics, Springer, vol. 6(4), pages 473-493.
  2. Turvey, Calum & Zhao, Jinhua, 1999. "Parametric And Non- Parametric Crop Yield Distributions and Their Effects on All-Risk Crop Insurance Premiums," Working Papers 244742, University of Guelph, Department of Food, Agricultural and Resource Economics.
  3. Hennessy, David A., 2011. "Modeling Stochastic Crop Yield Expectations with a Limiting Beta Distribution," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), April.
  4. Barry K. Goodwin, 2009. "Payment Limitations and Acreage Decisions under Risk Aversion: A Simulation Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 19-41.
  5. Black, J. Roy & Nugent, James & Rothwell, Nikki & Thornsbury, Suzanne & Olynk, Nicole J., 2010. "Michigan Production Costs for Tart Cherries by Production Region," Agricultural Economic Report Series 98205, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  6. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
  7. Wittenberg, Eric & Wolf, Christopher A., 2012. "2012 Michigan Land Values and Leasing Rates," Agricultural Economic Report Series 140027, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  8. Dabin Wang & William G. Tomek, 2007. "Commodity Prices and Unit Root Tests," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 873-889.
  9. Jan Hinrichs & Oliver Musshoff & Martin Odening, 2008. "Economic hysteresis in hog production," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 333-340.
  10. Me-Nsope, Nathalie Mongue, 2009. "Tart Cherry Yield and Economic Response to Alternative Planting Densities," Graduate Research Masters Degree Plan B Papers 54502, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  11. Martin Odening & Oliver Mußhoff & 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, January.
  12. Feng Song & Jinhua Zhao & Scott M. Swinton, 2011. "Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 764-779.
  13. Botzen, W.J.W. & Bouwer, L.M. & van den Bergh, J.C.J.M., 2010. "Climate change and hailstorm damage: Empirical evidence and implications for agriculture and insurance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 341-362, August.
  14. Nicolai V. Kuminoff & Ada Wossink, 2010. "Why Isn't More US Farmland Organic?," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 240-258.
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