Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables

Todd Schmit, Luo J. and J.M. Conrad

Energy Economics, 2011, vol. 33, issue 6, 1194-1205

Abstract: U.S. 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, U.S. ethanol policy has narrowed the distance between the optimal entry and exit curves, implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise.

Keywords: Ethanol; Investment; Real options; Policy; Volatility (search for similar items in EconPapers)
JEL-codes: C61 Q13 Q40 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Estimating the Influence of Ethanol Policy on Plant Investment Decisions: A Real Options Analysis with Two Stochastic Variables (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:33:y:2011:i:6:p:1194-1205

DOI: 10.1016/j.eneco.2011.07.013

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