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Abstract

Investing in a new perennial crop variety involves an irreversible commitment of capital and generates an uncertain return stream. As a result, the decision to adopt a new variety includes a significant real option value. Waiting for returns to rise above this real option causes a delay in adoption because of economic hysteresis. This study tests for hysteresis in the adoption of wine grape varieties using a sample of district-level data from the state of California. The empirical results show a significant hysteretic effect in wine grape investment, which might be reduced by activities that smooth earnings over time.

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