Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy

This paper applies an option-pricing model to analyze the impact of uncertainty about output prices and expectations of declining fixed costs on the optimal timing of investment in site-specific crop management (SSCM). It also analyzes the extent to which the level of spatial variability in soil conditions can mitigate the value of waiting to invest in SSCM and influence the optimal timing of adoption and create a preference for custom hiring rather than owner purchase of equipment. Numerical simulations show that while the net present value (NPV) rule predicts that immediate adoption is profitable under most of the soil conditions considered here, recognition of the option value of investment indicates that it is preferable to delay investment in SSCM for at least 3 years unless average soil quality is high and the variability in soil quality and fertility is high. The use of the option value approach reveals that the value of waiting to invest in SSCM raises the cost-share subsidy rates required to induce immediate adoption above the levels indicated by the NPV rule. © 2000 Elsevier Science B.V. All rights reserved.


Issue Date:
2000-12
Publication Type:
Journal Article
Record Identifier:
http://ageconsearch.umn.edu/record/176255
PURL Identifier:
http://purl.umn.edu/176255
Published in:
Agricultural Economics: The Journal of the International Association of Agricultural Economists, Volume 24, Issue 1
Page range:
9-21
Total Pages:
14




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

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)