Does timing matter? A real options experiment to farmers' investment and disinvestment behaviours

Hanna J. Ihli, Syster C. Maart-Noelck and Oliver Musshoff

Australian Journal of Agricultural and Resource Economics, 2014, vol. 58, issue 3, 430-452

Abstract: type="main" xml:id="ajar12028-abs-0001">

In this article, we analyse the (dis)investment behaviour of farmers in a within-subject designed experiment. We ascertain whether, and to what extent, the real options approach (ROA) and the classical investment theory can predict farmers' (dis)investment behaviour. We consider a problem of optimal stopping, stylising an option to (dis)invest in agricultural technology. Our results show that both theories do not explain exactly the observed (dis)investment behaviour. However, some evidence was found that the ROA predicted the decision behaviour of farmers better than the classical investment theory. Moreover, we found that farmers learn from repeated investment decisions and consider the value of waiting over time. Socio-demographic and farm-specific variables also affect the (dis)investment behaviour of farmers.

Date: 2014
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