Closing down the Farm: An Experimental Analysis of Disinvestment Timing

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.


Issue Date:
2011
Publication Type:
Conference Paper/ Presentation
Record Identifier:
http://ageconsearch.umn.edu/record/114375
PURL Identifier:
http://purl.umn.edu/114375
Total Pages:
13
JEL Codes:
C91; D81; D92




 Record created 2017-04-01, last modified 2018-01-22

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