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Does vertical integration reduce investment reluctance in production chains? An agent-based real options approach

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  • Balmann, Alfons
  • Musshoff, Oliver
  • Larsen, Karin

Abstract

This paper uses an agent-based real options approach to analyze whether stronger vertical integration reduces investment reluctance in pork production. A competitive model in which firms identify optimal investment strategies by using genetic algorithms is developed. Two production systems are compared: a perfectly integrated system and a system in which firms produce either the intermediate product (piglets) or the final product (pork). Simulations show that the spot market solution and the perfectly integrated system lead to a very similar production dynamics even with limited information on production capacities. The results suggest that, from a pure real options perspective, spot markets are not significantly inferior to perfectly integrated supply chains.

Suggested Citation

  • Balmann, Alfons & Musshoff, Oliver & Larsen, Karin, 2009. "Does vertical integration reduce investment reluctance in production chains? An agent-based real options approach," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 59521, Humboldt University Berlin, Department of Agricultural Economics.
  • Handle: RePEc:ags:huscpw:59521
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    File URL: http://purl.umn.edu/59521
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    Keywords

    real options; supply chain; agent-based models; genetic algorithms; Agribusiness; Agricultural and Food Policy; Agricultural Finance; Institutional and Behavioral Economics; Productivity Analysis;

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