Impact of Price Floors: A Real Options Based Experimental Approach

In order to stimulate investments, agricultural policies frequently use price floors, which guarantee a price above a certain limit. In some cases, however, a price floor does not have the desired effects. In this study, we experimentally analyse differences in the investment behaviour with respect to the presence of a price floor and compare the actual investment behaviour to normative benchmarks of the net present value and the real options approach. Furthermore, we look at treatment order and learning effects. The results show that the price floor has no significant impact on the decision behaviour of participants, whereas the effects of treatment order were statistically significant. Regarding the analysis of policy impacts, the latter result shows that the investment reluctance arising from an abolishment of a price floor is stronger than the investment stimulation arising from the introduction of a price floor. Consequently, neither the net present value nor the real options approach is appropriate to predict the investment behaviour in general. Nevertheless, we found out that the predictions of the real options approach enable an approximation of the participants’ investment behaviour if the individuals have an adequate chance to learn from personal experience.