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Climate change and coffee farm relocation in Ethiopia: a real-options approach

Author

Listed:
  • Luca Di Corato

    (Department of Economics, Ca' Foscari University of Venice)

  • Tsegaye Ginbo

    (Swedish University of Agricultural Sciences, Uppsala, Sweden)

Abstract

Climate change and emerging pest and diseases may negatively affect coffee yields and revenues in some Ethiopian regions. Hence, the relocation of coffee farms to other areas has been suggested. In this paper, we study how sunk establishment costs, uncertain net returns, and policy induced incentives may affect the timing and value of a coffee farm relocation. This is done by developing a real-options model taking into account the relevant drivers of the farmer's decision to relocate. We then present an empirical analysis examining a hypothetical relocation. We show that relocation is a rather attractive opportunity even though the presence of volatile net returns and relatively high establishment costs may induce its postponement. Thus, we identify under which circumstances subsidies may foster the relocation process and determine their amount.

Suggested Citation

  • Luca Di Corato & Tsegaye Ginbo, 2020. "Climate change and coffee farm relocation in Ethiopia: a real-options approach," Working Papers 2020:02, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2020:02
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    References listed on IDEAS

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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