Does timing matter? A real options experiment to farmers' investment and disinvestment behaviours

Ihli, Hanna Julia; Maart-Noelck, Syster C.; Mußhoff, Oliver

doi:10.1111/1467-8489.12028

Cited by 21 publications

(18 citation statements)

References 52 publications

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“…Based on the results of the mixed multinomial logit model, additional nonmonetary aspects that influenced the farmers’ investment timing were obtained. The variable “repetition” had a significantly negative effect on exercising the investment option “earlier than proposed by the ROA.” This finding was consistent with the insights of experiments with students (Oprea et al ) and farmers (Ihli et al ). Both experiments showed that the participants learned from their decisions and that the value of waiting was more significantly considered when repeating investments.…”

Section: Resultssupporting

confidence: 91%

“…Due to the aforementioned advantages, the explanatory power of the ROA has been investigated using economic experiments. For example, Ihli et al () experimentally tested the validity of the ROA with agricultural decision makers in the context of irrigation technologies. Furthermore, Maart‐Noelck and Musshoff () investigated the investment behavior of farmers in the context of arable land operations and nonagricultural investment possibilities.…”

Section: Framework Of the Roamentioning

confidence: 99%

“…The individual risk attitudes were considered using risk‐adjusted discount rates based on HL values (cf. Maart‐Noelck and Musshoff ; Ihli et al ). The calculation of the risk‐adjusted discount rates is explained in Appendix B (provided online).…”

Section: Approach To Data Analysismentioning

confidence: 99%

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An Experimental Approach to the Investment Timing of Conventional and Organic Hog Farmers

Vollmer

Hermann

Mußhoff

2016

Canadian J Agri Economics

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Politicians throughout the European Union support the extension of organic farming. Nevertheless, farmers are reluctant to invest in organic farming. Because nonmonetary aspects might be the reasons for this reluctance, this paper analyzes whether the farmers' investment behavior varies when given the option to invest in organic and conventional production methods. For this purpose, an incentivized experiment was conducted wherein conventional and organic hog farmers had the opportunity to consecutively invest in an organic and a conventional hog barn. Then, it was determined whether the farmers' investment timings differed between investments in the currently applied production method and the currently not-applied production method. These investment situations only differed in their description; the economic conditions were identical. The farmers' investment times in both production methods were compared to theoretically optimal investment times according to the real options approach (ROA). The results of the analysis show that a significant framing effect was associated with farmers' response to investment opportunities in organic and conventional hog barns. Farmers invested later if they invested in the currently not-applied production method. In these cases, the deviations between the ROA and the farmers' investment time were lower. Les politiciens de l'Union européenne appuient l'expansion de l'agriculture biologique. Pourtant, leséleveurs hésitentà s'y investir. Puisque des facteurs nonéconomiques pourraient expliquer cette réticence, cet article analyse les variations des décisions d'investissement des producteursà qui l'on offre un investissement dans les méthodes de production biologiques et classiques.À cette fin, une expérience incitative aété menée où leséleveurs de porcs se voyaient offrir l'occasion d'investir en succession dans une porcherie biologique et une classique. Ensuite, l'on aévalué si le calendrier d'investissements des producteurs différait en fonction de la méthode actuelle de production et celle qui n'est pas actuellement en usage. Ces situations d'investissement ne différaient que par leur description, les modalitéséconomiquesétant identiques. Les calendriers d'investissements deséleveurs utilisant les deux méthodes de production ontété comparés en fonction de l'approche des options réelles. Les résultats de l'analyse montrent qu'un effet significatif de formulation s'associe aux réactions deś eleveurs vis-à-vis des occasions d'investissements dans des porcheries biologiques et classiques. Lesproducteurs de porcs ont investi plus tard s'ils investissaient dans la méthode de production dont il ne se servait actuellement pas. Dans ces cas, l écart entre l'option réelle et le calendrier de l éleveur s'avérait moins grand.

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Section: Resultssupporting

confidence: 91%

Section: Framework Of the Roamentioning

confidence: 99%

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An Experimental Approach to the Investment Timing of Conventional and Organic Hog Farmers

Vollmer

Hermann

Mußhoff

2016

Canadian J Agri Economics

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“…To ensure a realistic description of “real‐world” agronomic conditions, all parameters in the business simulation game were validated by a panel of experienced farmers who are familiar with irrigation. It should be noted that fixed costs associated with irrigation system investment decisions are not a focus of this experiment [e.g., Ihli et al ., ]. We instead model a short‐term perspective in which irrigation infrastructure has already been installed extensively, as is the case in the region of investigation.…”

Section: Design Of the Experimentsmentioning

confidence: 99%

Irrigation water policy analysis using a business simulation game

2016

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Despite numerous studies on farmers' responses to changing irrigation water policies, uncertainties remain about the potential of water pricing schemes and water quotas to reduce irrigation. Thus far, policy impact analysis is predominantly based upon rational choice models that assume behavioral assumptions, such as a perfectly rational profit‐maximizing decision maker. Also, econometric techniques are applied which could lack internal validity due to uncontrolled field data. Furthermore, such techniques are not capable of identifying ill‐designed policies prior to their implementation. With this in mind, we apply a business simulation game for ex ante policy impact analysis of irrigation water policies at the farm level. Our approach has the potential to reveal the policy‐induced behavioral change of the participants in a controlled environment. To do so, we investigate how real farmers from Germany, in an economic experiment, respond to a water pricing scheme and a water quota intending to reduce irrigation. In the business simulation game, the participants manage a “virtual” cash‐crop farm for which they make crop allocation and irrigation decisions during several production periods, while facing uncertain product prices and weather conditions. The results reveal that a water quota is able to reduce mean irrigation applications, while a water pricing scheme does not have an impact, even though both policies exhibit equal income effects for the farmers. However, both policies appear to increase the variation of irrigation applications. Compared to a perfectly rational profit‐maximizing decision maker, the participants apply less irrigation on average, both when irrigation is not restricted and when a water pricing scheme applies. Moreover, the participants' risk attitude affects the irrigation decisions.

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“…While this approach has been well-established in economics (cf. Binmore, 1999), as well as in closely related disciplines such as agricultural economics (e.g., Ihli et al, 2014) or energy economics (e.g., Szolgayova et al, 2008), only a few publications apply experimental economics in the field of forest economics. A few studies in particular are using discrete choice experiments in this context (e.g., Joshi et al, 2013).…”

Section: Introductionmentioning

confidence: 99%

Faustmann vs. real options theory – An experimental investigation of foresters’ harvesting decisions

Sauter

Mußhoff

Möhring

et al. 2016

JFE

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JEL classification: Q23 C93 D22 Q28 Keywords: Experimental economics Forest harvesting decision Real options approach Faustmann-Pressler-Ohlin theorem Risk attitude Forest management Policy support a b s t r a c tAmong the most complex decisions in forestry is the decision of when to harvest a stand. Many investment theories have been established and adjusted to maximize profit, yet limited knowledge is available regarding the predictive power of theories. Understanding foresters' harvesting behavior, however, is important for forest management and policy support. Thus, the question arises as to what extent risky harvesting decisions comply with economic theories. Therefore, we conduct an incentive-based economic experiment with 107 forestry decision makers in order to analyze this research question. This approach is well-established in the field of behavioral economics since it has the advantage of analyzing certain economic parameters isolated from further aspects of the decision situation. We use the Faustmann-Pressler-Ohlin theorem and a real options approach as normative benchmarks. The present study provides evidence that none of the examined theories fully comply with the observed behavior. However, the harvesting behavior coincides significantly more with the real options theory than with the Faustmann-Pressler-Ohlin theorem. It can thus be stated that a higher degree of education leads to decisions that are more in accordance with the real options theory.

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Does timing matter? A real options experiment to farmers' investment and disinvestment behaviours

Cited by 21 publications

References 52 publications

An Experimental Approach to the Investment Timing of Conventional and Organic Hog Farmers

An Experimental Approach to the Investment Timing of Conventional and Organic Hog Farmers

Irrigation water policy analysis using a business simulation game

Faustmann vs. real options theory – An experimental investigation of foresters’ harvesting decisions

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