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Abstract

In this paper, we examine the real option to switching problems. We evaluate a situation where farmers can switch between different crops in response to crop price changes. We contribute to the literature in a variety of respects. First, in conventional models farmers can always choose to convert between different land uses at a cost. We extend the existing literature by adding a time cost as well as a cash cost. While pure cost models may be appropriate when farmers switch from farming sheep to cows and vice versa, in some activities, such as planting, this is not necessarily true, as there is a waiting time period as there is a delay in yields. Farmers in our example do not only face a cash cost but also face a prolonged period of no production until new crops reach maturity. Second, given the long conversion periods, our model allows farmers to reverse their switches. Given the complexity of the decision and thus the model, we employ computational methods to investigate how various factors enter into the decision making process.

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