Estimating the Influence of Ethanol Policy on Plant Investment Decisions: A Real Options Analysis with Two Stochastic Variables

Todd Schmit, Jianchuan Luo and Jon M. Conrad

No 126963, Working Papers from Cornell University, Department of Applied Economics and Management

Abstract: Ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms. The implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components, as well as the correlation between them. The effects of policy affecting plant revenues dominate the effects of those policies affecting production costs. In the absence of these policies, much of the recent expansionary periods would have not existed and market conditions in the late-1990s would have led to some plant closures. We also show that, regardless of plant size, national ethanol policy has narrowed the distance between the optimal entry and exit curves, implying a more narrow range of inactivity and a more volatile evolution for the industry than would have existed otherwise.

Keywords: Agribusiness; Resource/Energy Economics and Policy (search for similar items in EconPapers)
Pages: 32
Date: 2010
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:126963

DOI: 10.22004/ag.econ.126963

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