The impact of dynamic technical inefficiency on investment decision of Spanish olive farms

Spain occupies a first ranking position in worldwide production and exportation for olive oil and table olives. Such position is enforced by the positive evolution of investment demonstrated by an increase of approximately 5% of area dedicated to this cultivation during the last 6 years. This study analyzes Spanish olive sector investment decision taking into consideration the technical efficiency as a relevant element that could impact that decision by integrating the real option approach and a dynamic stochastic frontier model. This analysis has been applied to a 158 Spanish olive farms using FADN data set. 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 suggest that the decision of investment in Spanish olive depends also on technical inefficiency and it persistence. The increase of farms inefficiency means that the decision is to wait to invest. Consequently, the inefficient farmers take time and wait to invest, while a smaller persistence parameter leads to the decision to invest.

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

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