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Investment in farming under uncertainty and decoupled support: a real options approach

Luca Di Corato () and Dimitrios Zormpas ()
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Dimitrios Zormpas: Department of Mathematics, University of Padova

No 2019:06, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: Under the current version of the Common Agricultural Policy (CAP), payments to EU farmers are decoupled from the production of agricultural commodities. In fact, farmers qualify for CAP support as soon as their land is maintained in good agricultural and environmental condition. In this paper, we study how decoupled payments influence the decision to invest in farming. We show that decoupling is implicitly providing a costless hedge against volatile farming profits. Consequently, a higher decoupled payment leads the potential farmer to hasten its investment but also results in a farm with lower productive capacity.

Keywords: Decoupling; Real Options; Land Development; Capital Intensity; Passive Farming (search for similar items in EconPapers)
JEL-codes: C61 Q15 R14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-cfn
Date: 2019
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