Economics at your fingertips  

Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –

Hanna Julia Ihli, Syster Christin Maart and Oliver Musshoff ()

No 124532, 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association

Abstract: In agriculture, long-term decisions are usually made in an environment which is almost completely dynamic. For example, uncertainty arises from weather and climatic conditions. (Dis)investment in irrigation technology on farms has become more prominent over the past decade. The use of irrigation has become crucial in many parts of the world as an adaptation strategy to climate change. The purpose of this study is to test whether the Real Options Approach can help to explain why farmers often choose to postpone (dis)investments that appear to be immediately profitable. We combine investment and disinvestment decisions in one experiment using a “within-subject” design and carrying out a comparative analysis between the Net Present Value approach and the Real Options Approach in order to ascertain which of the methods provides a better prediction of the investment and disinvestment behavior of farmers. In our study, we consider a simple optimal stopping (dis)investment problem in which farmers can invest in as well as abandon irrigation technology. Our results show that both theories do not explain the observed (dis)investment behavior exactly. However, some evidence was found that the Real Options Approach provides a better prediction of the (dis)investment behavior of farmers than the Net Present Value approach. Moreover, we find that farmers learn from repeated investment decision-making and consider the value of waiting over time, whereas in disinvestment situations, farmers exaggerate the option to delay. We also find that farmers demonstrate different (dis)investment behavior depending on the order in which they were faced with the investment and disinvestment treatments.

Keywords: Agribusiness; Farm Management; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 44
Date: 2012
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link) ... ion%20Technology.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.22004/ag.econ.124532

Access Statistics for this paper

More papers in 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().

Page updated 2022-07-25
Handle: RePEc:ags:aaea12:124532