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Abstract

A manager of a food processing facility faces the dilemma that postponing a treatment (such as fumigation) in order to save money, risks allowing insect population to increase to an amount that causes economic damage. This economic damage includes buyer discounts due to presence of insects or insect damage, cost of extra treatments needed, or rejection by a buyer. Conversely, fumigating too early may allow the remaining insect population to rebound sufficiently that another expensive fumigation is necessary earlier than it would have been. Managers need economic guidelines to make insect control decisions that fully consider treatment costs, effectiveness, and costs of failing to control insects. Here, we value the tradeoff between fumigating now and fumigating later using a real options approach, which measures the risk tradeoff in money terms. Specifically, we consider a food-processing manager who is facing a timing decision to shut down the whole facility for fumigation. The approach can be easily expanded to value the risk/reward tradeoffs of alternative insect control strategies, including integrated pest management strategies that include sampling and monitoring, helping food processing firms make better insect control decisions.

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