Anticipate, wait or don't invest? The strategic net present value approach to study expansion decisions under policy uncertainty

Abstract

Dutch dairy farmers used different investment strategies in their production capacity in the periods around the abolishment of the European Union milk quota. Some farmers anticipated and expanded their production, others waited till expected policies were implemented or did not change their production. We develop a theoretical framework that integrates investment strategies—anticipating, waiting, or not investing—in the presence of policy uncertainty. We provide a numerical illustration of the framework to a typical Dutch dairy farm considering to expand the milk production. Results show that farmers would anticipate when they expect that the right system will be implemented with delay and will have low financial consequences. A low risk aversion reinforces the adoption of the anticipation strategy. The implications for policy and practice are discussed [EconLit Citatons: D22, Q00, Q18].

Do Dutch farmers invest in expansion despite increased policy uncertainty? A participatory Bayesian network approach

“…More specifically regarding the role of policy uncertainty, the results indicate that experts believe risk‐taking farmers are likely to invest earlier in the presence of policy uncertainty than risk‐averse farmers. These results are in line with the findings of Yanore et al (2022), who found that risk‐taking farmers are more likely to invest early under policy uncertainty. However, it should be noticed that an objectively higher policy uncertainty does not necessarily translate into higher perceived policy uncertainty, which may explain why some Dutch farmers invested at an early stage in the period before and after the dairy quota abolishment despite higher objective policy uncertainty.…”

“…More specifically regarding the role of policy uncertainty, the results indicate that experts believe risk-taking farmers are likely to invest earlier in the presence of policy uncertainty than risk-averse farmers. These results are in line with the findings of Yanore et al (2022), who found that risk-taking farmers are more likely to invest early under policy uncertainty.…”

“…Whereas the Real Options approach will be sufficient to deal with a range of uncertainties, several studies have shown that increased uncertainty may lead to the decision to invest early (Hassett & Metcalf, 1999; Smit & Trigeorgis, 2017; Welling, 2016). Based on the work of Smit and Trigeorgis (2017), Yanore et al (2022) proposed an economic framework to calculate the value of three investment strategies in the presence of policy uncertainty. The optimal investment strategies—anticipating and investing early, waiting, or not investing at all—can be presented in a strategic net present value (SNPV) framework as: where reflects the net present value of a base situation without strategy considerations, is the anticipation value, and is the waiting value.…”

“…Increased policy uncertainty may expedite the investment (e.g., Hassett & Metcalf, 1999), a phenomenon that has been observed in the Dutch dairy sector in recent years. There are three investment strategies: anticipate policy uncertainty and invest early, wait with investing, or not investing at all (Yanore et al, 2022). While it was highly uncertain how environmental policies and regulations related to phosphate emissions would evolve, Dutch dairy farmers invested in expanding milk production, resulting in a milk supply increase of 22% between 2012 and 2017 (CBS, 2018).…”

“…How these risk and time preferences affect investment decisions in response to policy uncertainty in a farming context is not studied extensively. Previous work using the SNPV framework suggests that risk-averse farmers are more (less) likely to adopt the waiting (anticipation) strategy in response to policy uncertainty (Yanore et al, 2022). Regarding time preferences, in a more general uncertain environment, it has been suggested that investment behavior is better described by hyperbolic preferences (Grenadier & Wang, 2007).…”