Investment and the dynamic cost of income uncertainty: The case of diminishing expectations in agriculture

T. Heikkinen and Kyosti Pietola

European Journal of Operational Research, 2009, vol. 192, issue 2, 634-646

Abstract: This paper studies optimal investment and the dynamic cost of income uncertainty, applying a stochastic programming approach. The motivation is given by a case study in Finnish agriculture. The investment decision of a representative farm is modelled as a Markov decision process, extended to account for risk. A numerical framework for studying the dynamic uncertainty cost is presented, modifying the classical expected value of perfect information to a dynamic setting. The uncertainty cost depends on the volatility of income: e.g. with stationary income, the dynamic uncertainty cost corresponds to a dynamic option value of postponing investment. The model can be applied to agricultural policy planning. In the case study, the investment decision is sensitive to risk.

Keywords: Investment; analysis; Real; options; Stochastic; programming; OR; in; agriculture (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (11)

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Working Paper: Investment and the Dynamic Cost of Income Uncertainty: the Case of Diminishing Expectations in Agriculture (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:192:y:2009:i:2:p:634-646

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