Closing down the Farm: An Experimental Analysis of Disinvestment Timing

Syster Christin Maart, Oliver Musshoff, Martin Odening and Christian Schade

No 114375, 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland from European Association of Agricultural Economists

Abstract: Agrarian structures are often characterized by some kind of economic inertia. It is particularly puzzling why unprofitable farms persist over time instead of being sold. In this paper we analyze the exit decision of farmers using the real options approach. The validity of the real options theory is assessed by means of laboratory experiments. Our results show that real options models are able to predict actual disinvestment decisions better than traditional investment theory. Nevertheless, the observed disinvestment reluctance was even more pronounced as predicted by theory. This finding suggests the inclusion of bounded rationality into normative disinvestment models.

Keywords: Agricultural Finance; Farm Management (search for similar items in EconPapers)
Pages: 13
Date: 2011
New Economics Papers: this item is included in nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaae11:114375

DOI: 10.22004/ag.econ.114375

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