Native Grassland Conversion: the Roles of Risk Intervention and Switching Costs

Ruiqing Miao, David A. Hennessy and Hongli Feng

No 145370, Hebrew University of Jerusalem Archive from Hebrew University of Jerusalem

Abstract: We develop a real option model of the irreversible native grassland conversion decision. Upon plowing, native grassland can be followed by either a permanent cropping system or a system in which land is put under cropping (respectively, grazing) whenever crop prices are high (respectively, low). Switching costs are incurred upon alternating between cropping and grazing. The effects of risk intervention in the form of crop insurance subsidies are studied, as are the effects of cropping innovations that reduce switching costs. We calibrate the model by using cropping return data for South Central North Dakota from 1989 to 2012. Simulations show that a risk intervention that offsets 20% of a cropping return shortfall increases the sod-busting cost threshold, below which native sod will be busted, by 41% (or $43.7/acre). Omitting cropping return risk across time underestimates this sod-busting cost threshold by 23% (or $24.35/acre), and hence underestimates the native sod conversion caused by crop production.

Keywords: Environmental Economics and Policy; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 45
Date: 2013-02
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Persistent link: https://EconPapers.repec.org/RePEc:ags:hebarc:145370

DOI: 10.22004/ag.econ.145370

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