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The analysis of irreversibility, uncertainty and dynamic technical inefficiency on the investment decision in Spanish olive sector

Fatima Lambarraa Lehnhardt (), Spiro Stefanou () and Jose Maria Gil

No 51397, 2009 Conference, August 16-22, 2009, Beijing, China from International Association of Agricultural Economists

Abstract: The purpose of this paper is the evaluation of the investment decision under uncertainty and irreversibility allowing for long run inefficiency. The analysis has been applied to a 158 Spanish olive farms using FADN data set. A real option approach has been used to analyse the decision to invest under uncertainty and irreversibility, and a dynamic stochastic frontier model has been developed to estimate the long run technical efficiency and it persistence. The results show that the technical inefficiency persistence parameter is fairly low to unity, which means that small technical inefficiency is transmitted to the next time period. The olive groves investment is irreversible and characterized by uncertainty on price and discount rate. An increase of discount rate means that the farmers take the decision to postpone investment. An increase on price along with a decrease of discount rate leads to the decision to invest with no option value of waiting to invest. The results also suggest that the decision of investment depend on technical inefficiency ant it persistence, the inefficient farmers take time and wait to invest, while at small persistence parameter the decision is to invest.

Keywords: Production; Economics (search for similar items in EconPapers)
Pages: 16
Date: 2009
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Journal Article: The analysis of irreversibility, uncertainty and dynamic technical inefficiency on the investment decision in the Spanish olive sector (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iaae09:51397

DOI: 10.22004/ag.econ.51397

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