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Abstract
Agricultural enterprises in transition
countries face dynamic changes in the prevailing
economic, legal and political conditions. The success of
an enterprise depends on its ability to adjust its farming
system in response to these changing conditions. To meet
this challenge, flexible and adaptable production
technology is required. Thus, the farm’s choice of
technology is an important decision which determines its
future performance. Although the concept of a firm’s
flexibility is widely analysed in microeconomics
literature, there is no comprehensive framework to
facilitate the analysis of family farms’ flexibility,
especially considering market imperfections and other
obstacles associated with the transition process.
In this paper we formulate the theoretical framework
for flexibility analysis in order to investigate the impact
of farm-specific characteristics on optimal flexibility
design and to explain the differences between farms
using different production technologies. In a simplified
formal model, a competitive risk-averse firm producing
one product is assumed to face fluctuating demand
under uncertainty. By choosing the level of flexibility,
the decision-maker determines the technology of the
firm, expressed by the cost function. The optimal level of
flexibility will be found by backward induction in the
two-stage decision-making process, including ex ante
technology decision and ex post output level decision.
Using comparative statics and existing theoretical
literature, some hypothesis about the relationship
between flexibility and other firm characteristics will be
formalised. Some possible model extensions that account
for specific characteristics of the family farm business in
transition countries, as well as future empirical analysis
are discussed.