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Abstract

We analyze dairies’ decisions to invest in voluntary GMO-free certification. Using a real-option model, we find the maximum precautionary investment in a single-firm setting. The model is extended to a non-cooperative game framework where dairies’ decisions are linked by their reputation gains and losses from investing and waiting, respectively. We show two main results: (1) smaller firms are more likely to invest; (2) both small and large firms may be worse off when it is optimal for both firm types to invest.

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