a model of entry exit decisions and capacity choice under demand uncertainty abstract many investment decisions of agribusiness firms such as when to invest in an emerging market or whether to expand the capacity of the firm involve irreversible investment and uncertainty about demand cost or competition this paper uses an option value model to examine the factors affecting an agribusiness firm s decision whether and how much to invest in an emerging market under demand uncertainty demand uncertainty and irreversibility of investment make investment less desirable than the net present value npv rule indicates the inactive firm is more reluctant to enter the market when it takes into account demand uncertainty because it preserves the opportunity of making a better investment later the active firm is more reluctant to abandon the investment because there is an option value of keeping the operation alive there is a greater distance between the entry and exit thresholds under the option value approach than under the npv rule due to demand uncertainty the results have implications for agribusiness decision making

co firing coal with wood pellets for u s electricity generation a real options analysis abstract in contrast to eu u s electric utilities are not employing the bioenergy technology of co firing wood pellets with coal this difference in employment patterns is explored within a real options analysis roa for possible u s utilization of wood pellets considering fuel price series from 2009 to 2014 for analysis these series are divided into two sub periods based on different market conditions infancy 2009 2011 and substitution 2012 2014 roa indicates co firing wood pellets with coal is feasible considering adoption during wood pellets infancy under low discount rates and long power plant lifespans a portfolio effect of employing multiple fuels underlies this result however co firing is not currently economically feasible the different adoption decisions are likely a consequence of recent cheap and abundant u s natural gas for co fired wood pellets to be feasible government incentives and or a market increase in natural gas prices appear necessary

some nonlinear tax effects on asset values and investment decisions under uncertainty abstract tax system nonlinearities are often ignored but with uncertainty may have important implications for the magnitude and direction of tax effects this paper studies a particular nonlinear tax rule the policy subsidizes asset values but may discourage some investments and encourage earlier shutdown of some projects the marginal effective tax rate varies with project risk furthermore a corporate cash flow tax can encourage investment due to interactions with the nonlinear policy the paper also presents a general statement of the stochastic equilibrium valuation method which can be used to analyze other nonlinear taxes numerical examples demonstrate computational feasibility

price setting during low and high inflation evidence from mexico this paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of mexican consumer prices covering episodes of both low and high inflation when the annual rate of inflation is low below 10 15 the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other in contrast the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases when inflation rises beyond 10 15 few price decreases are observed and both the frequency and average magnitude are important determinants of inflation i show that a menu cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by mexico

the relationship between the markup and inflation in the g7 economies and australia an i 2 analysis of inflation and the markup is undertaken for the g7 economies and australia we find that the levels of prices and costs are best described as i 2 processes and that except for japan a linear combination of the log levels of prices and costs cointegrate to the markup that is integrated of order 1 it is also shown that the markup in each case co integrates with inflation and that higher inflation is associated with a lower markup in the long run

the behavior of prices and inflation an empirical analysis of disaggregat price data this paper analyzes the effects of inflation on the dispersion of prices as well as other aspects of price behavior using disaggregated data on prices of foodstuffs in israel during 1978 84 we find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation we show that even in times of high inflation price quotations are not trivially short and price changes are not synchronized across firms these facts taken together confirm that there is some staggering in the setting of prices we find that the distribution of real prices is far from being uniform as many menu cost based models assume or conclude in fact as inflation increases to very high levels this distribution is not even symmetric when the annual inflation rate reaches 130 percent there are equal chances of finding real prices above or below the market average but upward deviations in the real price are further away from zero than downward ones furthermore as the annu

limited rationality and strategic interaction the impact of the strategic environment on nominal inertia much evidence suggests that people are heterogeneous with regard to their abilities to make rational forward looking decisions this raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results we examine this question in the context of a long standing and important economic problem the adjustment of nominal prices after an anticipated monetary shock our experiments suggest that two types of bounded rationality money illusion and anchoring are important behavioral forces behind nominal inertia however depending on the strategic environment bounded rationality has vastly different effects on aggregate price adjustment if agents actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment is both very slow and associated with relatively large real effects this adjustment difference is driven by price expectations which are very flexible and forward looking under substitutability but adaptive and sticky under complementarity moreover subjects expectations are also considerably more rational under substitutability

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

willingness to pay for sustainability labelled chocolate an experimental auction approach this study evaluates young consumers attitudes to sustainable food and analyzes the determinants of their willingness to pay wtp for chocolate bars with different sustainability labels data were collected through experimental auctions in italy assessing respondents n 80 aged between 18 and 35 wtp for chocolate bars with three selected labels i e fair trade rainforest alliance and carbon footprint econometric outcomes reveal that several socio demographic factors exert a positive and statistically significant effect on wtp for all the selected chocolate bars namely age cohort older gender female and household income high respondents lifestyles and food consumption habits also had an effect on final bids this study offers valuable insights to policy makers and practitioners for efficiently targeting young consumers in campaigns to increase sustainability labelled food consumption

incorporating stochastic variables in crop response models implications for fertilization decisions most crop decision models focus on output variation in response to nonstochastic inputs little attention has been given to the effects of stochastic factors on the input use decision a crop decision model is developed to examine the impact of soil moisture on the nitrogen fertilization decision the model is applied to 15 different soil and weather conditions for corn production in indiana based on estimated response functions the profit maximizing nitrogen application rate varies from 156 to 185 pounds of actual nitrogen n per acre we evaluate the expected economic losses arising from applying to one set of conditions a rate deemed optimal for another

risk risk aversion and on farm soil depletion abstract this paper studies the production and attendant soil depletion choices of a risk averse farmer in two related models the first is a two date model with uncertainty in both production and end of period land price the second is a three date model in which production and consumption choices are made in both periods but there is uncertainty only in the second period in both models the paper identifies plausible conditions under which a higher level of initial farmer wealth and or a lower level of production and land risk lead to a lower level of output and as a result a lower level of output induced soil depletion

staggered contracts and the frequency of price adjustment this paper describes a methodology for measuring the frequency of price change in order to test the relevance of assuming prices to be set for discrete periods of time at overlapping intervals taylor 1980 has related the frequency of adjustment to the rigidity of the economy in responding to unanticipated events estimates of the frequency of price change are computed from data on the component parts of the deflator for personal consumption expenditure the results show a substantial decrease in the period between price changes during the middle 1960s and marked fluctuations in the 1970s the movements suggest changes in the rigidity associated with both changes in general price inflation and changes in the posture of the fiscal and monetary authorities

price competition in an inflationary environment we study how inflation and deflation affect firms ability to cooperate in an experimental bertrand duopoly with differentiated products we find that there is significantly less cooperation in the treatments with inflation and deflation compared to the no inflation treatments the difficulties to cooperate affect prices and welfare depending on the market structure inflation and deflation lead to significantly lower real prices and higher welfare

the importance of consumer trust for the emergence of a market for green products the case of organic food consumer trust is a key prerequisite for establishing a market for credence goods such as green products especially when they are premium priced this article reports research on exactly how and how much trust influences consumer decisions to buy new green products it identifies consumer trust as a distinct volition factor influencing the likelihood that consumers will act on green intentions and strongly emphasizes the needs to manage consumer trust as a prerequisite for the development of a market for green products specifically based on a mixture of qualitative and quantitative methods it is found that lack of consumer trust is a barrier for the development of a market for organic food in thailand two focus groups and ten in depth interviews revealed low knowledge about and low trust in organic food certification control and labeling further a mall intercept survey n 177 revealed that lack of especially system trust reduces consumer expectations about benefits of buying organic food and it makes them less likely to buy organic food mistrust in the control system and in the authenticity of food sold as organic has a significant negative impact on self reported buying behavior implications for policy and future research are discussed

collaboration in tool development and capacity investments in high technology manufacturing networks the procurement of capital intensive tools for hi tech industries is one of the most complex tasks astronomical amounts of capital are invested in the processing equipment further there is a large effort from the original equipment manufacturer oem in customizing the high capital intensive equipment to suit their production process this problem has received little attention from the quantitative decision making literature for the first time we analyze the problem of oem deciding on collaborating with the tool supplier via a special type of contract which we refer as collaboration options we show that there are benefits to both the oem and the tool suppliers from the collaboration we develop a two stage strategic model for collaborative tool development and optimal capacity investment in the first stage we solve an optimal collaboration problem faced by the oem we formulate this problem as a discrete time stochastic stopping problem for a finite horizon we use a policy iteration algorithm for deciding on optimal collaboration policy in the second stage we model the optimal investment decision of the oem in tool development and capacity acquisition using real options theory unlike the traditional options literature we consider the option value determined from the first stage model and decide on the optimal amount for investment

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

option values to conservation and agricultural price policy application to terrace construction in kenya policy reforms to liberalize agricultural markets in developing countries are likely to influence both the level and the variability of prices while considerable attention has been given to the impact of changes in price level on soil and water conservation there has been relatively little analysis of the role of price variability in conservation decisions we present a model of investment under uncertainty to analyze the effect of both level and variability of prices on the decision to invest in conservation the model is applied to adoption of fanya juu terraces in eastern kenya

investment in site specific crop management under uncertainty implications for nitrogen pollution control and environmental policy this paper applies an option pricing model to analyze the impact of uncertainty about output prices and expectations of declining fixed costs on the optimal timing of investment in site specific crop management sscm it also analyzes the extent to which the level of spatial variability in soil conditions can mitigate the value of waiting to invest in sscm and influence the optimal timing of adoption and create a preference for custom hiring rather than owner purchase of equipment numerical simulations show that while the net present value npv rule predicts that immediate adoption is profitable under most of the soil conditions considered here recognition of the option value of investment indicates that it is preferable to delay investment in sscm for at least 3 years unless average soil quality is high and the variability in soil quality and fertility is high the use of the option value approach reveals that the value of waiting to invest in sscm raises the cost share subsidy rates required to induce immediate adoption above the levels indicated by the npv rule

holding on for too long an experimental study on inertia in entrepreneurs and non entrepreneurs disinvestment choices abstract disinvestment in the sense of project termination and liquidation of assets including the cession of a venture is an important realm of entrepreneurial decision making this study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non entrepreneurs our experimental results reject the standard net present value approach as an account of observed behavior instead most individuals seem to understand the value of waiting their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning we also observe a pronounced psychological inertia i e most individuals hold on to a losing project for even longer than real options reasoning would predict the study provides evidence for entrepreneurs and non entrepreneurs being quite similar in their behavior

technology choice under changing peanut policies the effect of marketing quotas and price supports on technology adoption are examined for peanut production in the southeastern united states using a real options model of investment with output price and yield uncertainty the optimal choice of peanut production technology dryland versus irrigated in the southeast is shown to depend on price supports and how they change the manner in which price supports change will have an effect on the choice and rates of abandonment or adoption of production technologies

implementing a stochastic model for oil futures prices this paper develops a parsimonious three factor model of the term structure of oil futures prices that can be easily estimated from available futures price data in addition it proposes a new simple spreadsheet implementation procedure the procedure is flexible may be used with market prices of any oil contingent claim with closed form pricing solution and easily deals with missing data problems the approach is implemented using daily prices of all futures contracts traded at the new york mercantile exchange between 1991 and 2001 in sample and out of sample tests indicate that the model fits the data extremely well though the paper concentrates on oil the approach can be used for any other commodity with well developed futures markets

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

convenience yield without the convenience a spatial temporal interpretation of storage under backwardation a mathematical programming model of the wheat marketing system of western australia manifests a typical pattern of regionwide stocks held at a negative intertemporal spread measured at the port no stocks are held at a monetary loss in terms of local prices any apparent loss is an illusion from spatial aggregation of stocks and attribution of incentives at one locality to storers at all locations moreover as the premium for immediate delivery at the port rises stocks increase at relatively inaccessible inconvenient locations where prices are low allowing more to be shipped from locations more convenient to the port

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

hysteresis due to irreversible exit addressing the option to mothball abstract this paper analyses the following hitherto understudied feature in real switching options a firm has a mothballing option and an option to permanently abandon if the firm finds itself in an operating mode with a price just above the abandonment threshold it is unclear whether to exercise the abandonment option or to exercise the mothballing option if the price goes down the firm may exit but surprisingly if it goes up it may mothball we find that two different strategies could be optimal one where mothballing is not a viable option and one where mothballing does occur in the latter case a hysteresis region arises in which the firm produces at a loss while a further price decrease induces exit and a sufficient price increase results in the firm entering the mothballing stage mothballing being optimal requires sufficiently large values of the price trend and the uncertainty parameter

food price variability and economic reform an arch approach for ghana changes in maize price levels and variability in ghana are investigated a model of wholesale price determination is reviewed in which grain stocks are held for speculative storage as well as export to neighboring countries in the sahel to test the model an autoregressive conditionally heteroskedastic arch regression is applied to monthly maize data for two markets over the period 1978 93 the regression is used to measure changes in maize price volatility in ghana and to infer the importance of past prices domestic and regional production and commodity storage and trade in explaining these changes

a comparison of alternative crop response models three parsimonious models are hypothesized to represent com yield response to nitrogen and phosphorus each model imposes specific restrictions with regard to the elasticity of factor substitution and growth plateau nonnested hypothesis tests are used to evaluate the competing hypotheses the results support the restrictions imposed by the mitscherlich baule model for these data corn response is characterized by limited substitution between nitrogen and phosphorus and a growth plateau further the cost of using optimal input levels implied by the mitscherlich baule if it were not true is small relative to the other parsimonious forms and a translog approximation

factors influencing willingness to pay for the energy star label abstract in the united states nearly 17 of greenhouse gas emissions come from residential energy use increases in energy efficiency for the residential sector can generate significant energy savings and emissions reductions consumer labels such as the us environmental protection agency s energy star promote conservation by providing consumers with information on energy usage for household appliances this study examines how the energy star label affects consumer preferences for refrigerators the results of an online survey of a national sample of adults suggest that consumers are on average willing to pay an extra 249 82 349 30 for a refrigerator that has been awarded the energy star label furthermore the results provide evidence that respondent willingness to pay was motivated by both private energy cost savings and public environmental benefits

beyond ecolabels what green marketing can learn from conventional marketing ecolabels have emerged as one of the main tools of green marketing although a great deal of effort has been invested in making them more effective and efficient the market share of ecolabelled products is still low partly because they have been addressed mainly to green consumers in a theoretical exposition of marketing theory we find that green marketing could learn from conventional marketing in discovering other means than labelling to promote green products examples include addressing a wider range of consumers working with the positioning strategies of price place and promotion and actively engaging in market creation

the effects of pricing policies on water conservation and drainage a general model of adoption of input conserving technologies by competitive firms is introduced using drip irrigation as an example an environmental regulation such as a drainage effluent charge is shown to influence adoption early adopters are likely to be producers with less efficient fixed assets land of low quality or antiquated capital higher input costs higher water prices or greater depth to groundwater and in more environmentally sensitive regions simulations show that drainage regulations can be expected to play a major role in adoption of more efficient irrigation technologies in california thus conservation may be a key to solving resource scarcity problems and reducing external environmental costs

irrigation technology adoption and its implication for water conservation in the texas high plains a real options approach water shortage has been a significant issue for several decades in the texas high plains agriculture has been identified as the main activity contributing to this shortage to address this issue many efforts have been focused on the possible adoption of sophisticated irrigation systems with high levels of water application efficiency in this study the entry and exit thresholds for the low energy precision application lepa system are analyzed simultaneously in cotton farming in the texas high plains using a real options approach the results show that the lepa system is profitable only when cotton price is set above 1 59 kg the exit entry threshold is consistently low high over a range of values for parameter changes including investment cost exit cost variable cost risk adjusted discount rate and volatility rate so it is unlikely that farmers with irrigation systems in place would leave them easily this implies that to attain the goal of saving water lubbock county needs to focus on convincing current farmers to replace old irrigation systems with new ones

on the optimal inflation rate abstract in our incomplete markets economy households choose portfolios consisting of risky uninsurable capital and money money is a bubble it has positive value even though it yields no payoff the market outcome is constrained pareto inefficient due to a pecuniary externality each individual agent takes the real interest rate as given while in the aggregate it is driven by the economic growth rate which in turn depends on individual portfolio decisions higher inflation due to higher money growth lowers the real interest rate on money and tilts the portfolio choice towards physical capital investment modest inflation boosts growth rate and welfare

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

optimal soil conservation and the reform of agricultural pricing policies abstract soil degradation is often blamed for the poor performance of agriculture in developing economies so too are policies which keep the prices of both outputs and inputs artificially low some economists have argued that pricing reforms will encourage soil depletion others say that such reforms will encourage soil conservation to evaluate these claims this paper develops models of the optimal control of soil erosion and soil fertility it is shown that the effect could go either way but that there are strong reasons for suspecting that pricing reforms will not affect soil conservation dramatically

links between rural poverty and the environment in developing countries asset categories and investment poverty abstract this paper presents a framework for analyzing the links between poverty and the environment in rural areas of developing countries it introduces the concept of investment poverty and relates it to other measures of poverty in analysis of these links the notion of poverty is examined in the context of categories of assets and categories of environment change with particular focus on farm household income generation and investment strategies as determinants of the links the strength and direction of the poverty environment links are shown to differ even invert depending on the composition of the assets held by the rural poor and the types of environmental problems they face policy strategies need to focus on conditioning variables that affect market development community wealth infrastructure household asset distribution and the affordability and appropriateness of natural resource conservation technologies

price policy and returns to soil conservation in semi arid kenya this paper develops an approach that uses relatively easily available data to examine empirically how policy induced price changes affect the incentives of farmers in developing countries to adopt soil conservation measures the model shows that there is no simple relationship between price distortions created by government policies and farmers incentives to adopt conservation measures policy induced price changes could lead to either more or less conservation depending on site specific conditions data from a semi arid region in kenya are used to illustrate the magnitude and direction of changes in price policy on returns to terracing and to show how results are affected by the nature of the conservation technology in the study area higher commodity prices increase incentives to adopt conservation measures on steep slopes but lower them on shallower slopes if terraces were to require more land to be taken out of production than assumed in the calculations higher commodity prices would tend to discourage farmers from adopting them

the hidden costs of renewables promotion the case of crop based biogas abstract this paper finds that specific characteristics of bioenergy investments namely long times to build relatively high variable costs and the managerial ability of corrective actions during the project help bioenergy producers to respond to market uncertainties this effect is shown to compromise the economic effectiveness of bioenergy policies the paper compares the effectiveness of financial and regulatory incentive programs aiming to stimulate production of crop based biogas a stylized stochastic real options based investment model is developed to analyze the investment behavior of biogas producers under alternative policies the model is solved by a numerical approach combining stochastic simulations and the genetic algorithm technique unless bioenergy schemes account for structural characteristics of the bioenergy industry they will tend to encourage investments in unused production capacities this would cause additional welfare costs and benefit mainly crop producers

a real options analysis of coffee planting in vietnam vietnam grew from an insignificant to the world s second largest coffee producer during the 1990s to understand this growth this article examines vietnamese coffee growers investment decisions using real options theory the study finds that producers with variable costs of 19 cents lb and total cost of 29 3 cents lb would enter coffee production at a coffee price of 47 cents lb and exit at a coffee price of 14 cents lb most vietnamese growers appear to be sufficiently efficient to continue producing coffee even at relatively depressed price levels

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

new evidence on inflation persistence and price stickiness in the euro area implications for macro modeling this paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modeling it argues that several of the most commonly used assumptions in micro founded macro models are seriously challenged by the new findings jel e31 e52

economic feasibility of variable rate technology for nitrogen on corn the economic feasibility of three different fertilizer management strategies constant rate three rate and multiple rate technology in the application of nitrogen fertilizer to corn are compared under different probability distributions for field fertility a constant rate was more profitable than either variable rate technology system for homogeneous fields with low fertility the application area at which the relative profitability between systems changed was largely determined by the characteristics of the fertility distribution rather than by assumptions regarding costs variable rate technology improves groundwater quality in low fertility fields by reducing total fertilizer applied and in high fertility fields by increasing corn yield

adding value to spatially managed inputs by understanding site specific yield response abstract many mechanized crop producers and agribusinesses are fascinated with precision agriculture technology but adoption has lagged behind the expectations among the reasons for slow adoption of precision agriculture technology is that initial users focused excessively on in field benefits from variable rate fertilizer application using regional average fertilizer recommendations this article illustrates how greater use of site specific crop response information can improve variable rate input application recommendations precision agriculture is spatial information technology applied to agriculture the technologies include global position systems gps geographic information systems gis yield monitoring sensors and computer controlled within field variable rate application vra equipment experimentation with these technologies is occurring everywhere there is large scale mechanized agriculture commercial use has been greatest in the us where 43 of farm retailers offered vra services in 2001 except for certain high value crops like sugar beet farmer adoption of vra has been modest the farm level profitability of vra continues to be questionable for bulk commodity crops the theoretical model and illustration presented here suggest that vra fertilization has not yet reached its profitability potential most vra field trials to date have relied upon existing state wide or regional input rate recommendations unobserved soil characteristics can potentially interact with an input to make its effect on yield vary site specifically within fields failure to use site specific response functions for vra applications may lead to a misallocation of inputs just as great as that which results from using uniform applications instead of vra agricultural economists have a long history of estimating output response to input applications several have started to develop tools to estimate site specific responses from yield monitor and other precision agriculture data likewise agricultural economists have developed an important body of research results on information value based on managing variability typically in temporal settings with these tools a major potential exists to develop further benefits from precision agriculture technologies that permit truly spatially tailored input applications

the diffusion of clean technologies a review with suggestions for future diffusion analysis abstract this article gives an overview of the literature on clean technology diffusion followed by suggestions for future analysis findings from diffusion analysis are presented in the form of 10 stylised facts helping the reader to see the forest for the trees the overall conclusion is that the diffusion of clean technology same as the diffusion of normal innovations is governed by endogenous mechanism epidemic learning and learning economies and by exogenous mechanisms policy is important for clean technology diffusion but other factors are important too the characteristics of the clean technology absorptive capacities of potential adopters and the age structure of capital it is often overlooked that companies have a choice they can choose between an end of pipe solution a process change adaptation and a change of process substitution this means that the diffusion and evolution of one clean technology will be at the expense of the diffusion of another clean technology something overlooked in studies on clean technology diffusion further research is needed on the influence of public policy on clean technology choice expectations about learning economies and prices adjustment costs network externalities and complementary innovations on clean technology adoption choices

regulation and corporate investment policy in a previous paper it was shown that the traditional rule that the allowed return on the equity of a regulated firm should be set equal to its cost of equity capital was conceptually deficient 2 this deficiency arises because the cost of equity capital of a regulated firm depends upon its risk which depends in turn upon the regulatory policy that will be followed in the future including the allowed rate of return it was argued therefore that this traditional rule should be replaced by the requirement that the regulatory policy be consistent a consistent regulatory policy achieves what the traditional rule only attempts it ensures that at the time of a regulatory hearing the market value of the firm equity is equal to the equity financed portion of the rate base to devise a consistent regulatory policy it is necessary to have a valuation model which takes explicit account of regulatory policy such a model was developed in the above mentioned paper in this paper we generalize the earlier valuation model so that the investment policy of the regulated firm is determined by the value maximizing decisions of the management instead of being taken as exogenous to the extent that investment policy is discretionary its endogeneity must be taken into account in devising a consistent regulatory policy and this is made possible by the generalized model in reality it seems unclear to what extent the investment policies of regulated firms are predetermined by the requirement that they meet demand and to what extent they are discretionary since the model presented here easily accommodates constraints on the investment policy it is the more appropriate model so long as there exists any element of discretionary investment behaviour and permits a more adequate approach to the determination of consistent regulatory policies with discretionary investment policy an important consequence of any particular consistent regulatory policy is the investment policy it induces in section 4 we show how the value maximizing investment policy is affected by the choice of regulatory policy on the other hand regulated firms are wont to argue that their investments are in the main predetermined by demand and must be undertaken regardless of their profitability this putative lack of discretion it is maintained means that the appropriate allowed rate of return is higher than would otherwise be the case in section 4 also we evaluate the strength of this consideration by comparing the allowed rate of return under consistent regulatory policies when investment policy is and is not discretionary section 5 shows briefly how the analysis can be extended to account for the effect of debt in the capital structure

an i 2 analysis of inflation and the markup an i 2 analysis of australian inflation and the markup is undertaken within an imperfect competition model it is found that the levels of prices and costs are best characterized as integrated of order 2 and that a linear combination of the levels which may be defined as the markup cointegrates with price inflation from the empirical analysis we obtain a long run relationship where higher inflation is associated with a lower markup and vice versa the impact in the long run of inflation on the markup is interpreted as the cost to firms of overcoming missing information when adjusting prices in an inflationary environment copyright 2001 john wiley sons ltd

technology adoption decisions under irreversibility and uncertainty an ex ante appproach empirical results demonstrate that uncertainty about costs and requirements for environmental compliance is an important determinant of dairy producers investment behavior ex ante forecasting of how uncertainty and irreversibility are likely to affect producers responsiveness to agricultural technologies has implications for the design of environmental policies simulation modeling methods are described the empirical analysis focuses on texas producers propensity to adopt free stall dairy housing free stall investments offer advantages for both productivity augmentation and pollution abatement yet uncertainty and irreversibility are obstacles to adoption implications of this ex ante paradigm for policy design and implementation are discussed

resource extraction with a carbon tax and regime switching prices exercising your options this paper develops a model of a profit maximizing firm with the option to exploit a non renewable resource choosing the timing and pace of development the resource price is modelled as a regime switching process which is calibrated to oil futures prices a hamilton jacobi bellman equation is specified that describes the profit maximization decision of the firm the model is applied to a problem of optimal investment in a typical oils sands in situ operation and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction as well as to operate mothball or abandon the facility regime shifts can have an important effect on the optimal timing of investment and extraction the paper examines the effect of several carbon tax schemes on optimal timing of construction production and abandonment a form of green paradox is identified

emission permit banking pollution abatement and production inventory control of the firm abstract in this paper we present a dynamic model modified with emission permit banking and pollution abatement and investigate the effect of emission permit banking and pollution abatement on the production inventory strategy of the firm after introducing emission permit banking and pollution abatement the cost function consists of the inventory holding and production costs the cost of investment in abatement capital goods and the emission procurement selling cost furthermore the inventory holding costs are linear production costs are non decreasing and convex functions of the production level and the costs of investment in abatement capital goods are increasing and convex functions of the investment level we compare the optimal production inventory strategy before emission permit banking and pollution abatement and thereafter the mathematical investigation is based on the arrow karlin model

a model for fair trade buying behaviour the role of perceived quantity and quality of information and of product specific attitudes in a sample of 615 belgians a model for fair trade buying behaviour was developed the impact of fair trade knowledge general attitudes towards fair trade attitudes towards fair trade products and the perception of the quality and quantity of fair trade information on the reported amount of money spent on fair trade products were assessed fair trade knowledge overall concern and scepticism towards fair trade and the perception of the perceived quantity and quality of fair trade information influence buying behaviour directly and indirectly through product attitudes interest in fair trade products price acceptability and product liking have a significant impact on fair trade buying behaviour product interest is the most important variable influencing buying behaviour implications for the campaigns of governments and for the marketing strategy of fair trade organisations are offered

are there spatial spillovers in the adoption of clean technology the case of organic dairy farming this paper examines spatial spillovers associated with the adoption of organic dairy farming we hypothesize that neighboring farmers can help to reduce the uncertainty of organic conversion by lowering the fixed costs of learning about the organic system a spatially explicit 10 year panel dataset of more than 1 900 dairy farms in southwestern wisconsin is used as input into a reduced form econometric model of the decision to convert to organic production using an identification strategy that exploits the panel aspect of the micro dataset we find evidence that the presence of neighboring organic dairy farms affects the conversion decision

do fair trade and eco labels in coffee wake up the consumer conscience abstract in this study a face to face survey was conducted in order to reveal consumer preferences for ethical and environmentally sound labeling programs in coffee valuation questions regarding the fair trade shade grown and organic coffee labels were asked using a payment card format after consumers were previously informed about each of the labeling programs results suggest that consumers are very receptive toward both fair trade and shade grown coffee labels and consequently are willing to pay higher premiums for these labeling programs than for the organic coffee

optimal timing of technology adoption abstract in a dynamic programming framework this paper investigates the optimal timing of technology adoption by a competitive firm when technology choice is irreversible and the firm faces a stochastic innovation process with uncertainties about both the speed of the arrival and the degree of improvement of new technologies a numerical example illustrates how the optimal timing decision is affected by changes in parameter values reflecting market conditions the firm s initial technological attributes and the characteristics of the stochastic innovation process some of these effects turn out to be in sharp contrast to common intuition contrasting the optimal decision rule derived here with the rule obtained under the net present value shows that the former implies a slower pace of adoption than implied by the latter the optimal decision rule is generalized for the case of multiple technology switches and it is shown that for all the switching decisions except the last one the optimal rule satisfies the net present value criterion

optimal forest rotation when stumpage prices follow a diffusion process a key assumption in the faustmann rule for financial maturity is that stumpage prices are constant over time timber price series however exhibit wide fluctuations over time which this paper models as a lognormal diffusion process comparing the diffusion results modeled here to the fixed price faustmann results show 1 the prescribed rotation length is generally longer 2 computed stand values are higher using the diffusion model with the greatest divergence occurring when a stand is about the midpoint of a rotation 3 as the stumpage price volatility increases the gain in computed npv increases though in a nonlinear fashion

irreversible investment uncertainty and ambiguity the case of bioenergy sector we analyze production and investment decisions of an agent in industrial activities that are characterized by two forms of uncertainty demand uncertainty in terms of number of buyers and competitive effect uncertainty in terms of other energy resource we apply our model on the bioenergy industries we compare the case of an ambiguity neutral agent with that of an ambiguity averse agent we show that the investment decision of an agent depends on the effects of both the capital investment and the level of production on the cost and the uncertainty the agent is confronted with moreover we find that ambiguity aversion tends to decrease the agent s optimal levels of production and investment our numerical analysis of the french case illustrates the different effects associated with demand uncertainty and competitive effect uncertainty

investment decisions in hog finishing an application of the real options approach in this paper option pricing theory is applied to an investment problem in hog production a stochastic simulation model capable of pricing american type options is developed this is achieved by recursive calculation of the exercise frontier the model is used to determine the investment trigger and the disinvestment trigger for a pig fattening barn under german market conditions it turns out that the investment trigger taking into account the value of waiting in an uncertain environment can be considerably higher compared to classical investment criteria such as the net present value this offers an explanation as to why farmers are indeed reluctant to invest in hog production another finding is the sensitivity of the option prices with respect to the stochastic process that is assumed for revenues and variable costs of the production activity

can real option values explain apparent storage at a loss since decisions to sell grain are irreversible waiting to sell grain can have a real option value this real option value may explain why producers appear to store too long a new seasonal mean reversion model is estimated that allows prices to be a random walk with drift within a season but mean reverting across crop years unless prices are extremely low selling before mean reversion begins is optimal thus the real option value of waiting does not explain why some producers seem to store at a loss in the latter part of crop years

stochastic technology risk preferences and adoption of site specific technologies a model of farmer decision making is developed to determine the extent to which uncertainties about soil fertility and weather affect the value of site specific technologies ssts using jointly estimated risk and technology parameters uncertainty can lead risk averse farmers to apply more fertilizers and generate more pollution than in the certainty case ignoring uncertainty and risk aversion would overestimate the economic and environmental benefits of ssts and underestimate the subsidy required to induce adoption accounting for uncertainties and risk preferences might explain the low observed adoption rates of ssts improving the accuracy of ssts would increase the incentives for adoption

the option value of advanced r d existing tools for making r d investment decisions cannot properly capture the option value in r d since many new products are identified as failures during the r d stages the possibility of refraining from market introduction may add a significant value to the npv of the r d project this paper presents new theoretical insight by developing a stochastic jump amplitude model in a real setting the option value of the proposed model depends on the expected number of jumps and the expected size of the jumps in a particular business the model is verified with empirical knowledge of current research in the field of multimedia at philips corporate research this way the gap between real option theory and the practice of decision making with respect to investments in r d is diminished

unveiling ethical product features the importance of an elaborated information presentation abstract despite growing consumer awareness of ethical consumption market sales are not growing accordingly because the presentation of appropriate ethical product information may influence consumers to choose ethical products this paper analyses the requirements necessary for the successful communication of ethical product features based on mcguire s 1976 information processing model and a review of current literature the information s comprehensibility meaningfulness and credibility are investigated in an online survey of us american citizens n 595 for two product categories representing fast moving consumer goods and durable goods a generalized mixed logit model revealed that all three communication factors affect consumers choices the more concerns about or expertise in organic production and fair trade purchase the consumers expressed the less important their price sensibility and the more they preferred a comprehensive addendum and credible sources e g government certificate or traceability the results strongly suggest that advertisers and marketers can customize product communications in order to better engage both the mass market and ethically oriented consumers

agricultural insurance and soil depletion in a simple dynamic model we study the effects of agricultural insurance on farm production choices soil depletion and the environment when there are two related risks one in short to medium run production revenues and the other in land value the analysis considers pure and truncating insurance programs that stabilize linear combinations of short run revenue risk and land price risk production revenue stabilizing insurance is often found to elicit increased farmer output thus exacerbating environmental externalities and causing further soil depletion land value stabilizing insurance typically elicits lower output thus mitigating environmental externalities and pushing farmers closer to their complete insurance output levels

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

the impact of marketing systems on soil sustainability of agriculture in developing countries a method and an application this article is concerned with soil sustainability problems of agriculture in developing countries in particular with soil erosion the aim of our study is to develop a comprehensive model that explains the adoption of sustainable agricultural practices with respect to soil conservation our approach includes the following special features a the model is comprehensive in that it includes a large number of institutional personal social economic and physical explanatory variables b particular attention is paid to the influence of marketing systems on the adoption of sustainable agricultural practices which to our knowledge has been neglected in past research c the concept of adopting sustainable agricultural practices asap is differentiated into a limited number of basic components of soil conservation and d the model is estimated by principal component regression which enhances efficient estimation of the impact of many explanatory variables on asap our model is applied to cabuyal hillside farming in colombia the application demonstrates the usefulness of the proposed model asap is differentiated into three basic components soil disturbance control soil protection practices and run off control it appears that soil disturbance control is particularly influenced by farmers characteristics such as education and managerial variables the second component soil protection practices appears to be strongly influenced not only by farmers managerial variables but also by their relationship with their environment in particular marketing institutions the third soil conservation component run off control is influenced by the physical characteristics of the plot and by the available farm labor our empirical results demonstrate the usefulness of the proposed model in designing agricultural policies because it can determine which variables are more likely to influence the adoption of a specific type of soil conservation

the case for a real options approach to ex ante cost benefit analyses of agricultural research projects the united states agency for international development usaid like many other development agencies and donors increasingly emphasizes evidence based programming this requires assessments of project performance at all stages of implementation comprising ex ante impact assessment monitoring and evaluation and ex post attribution of outcomes ex ante impact assessment in particular involves performing cost benefit analysis cba to determine the expected net present value enpv of the project in question unfortunately the traditional enpv approach has proven inadequate for dealing with uncertainty in the timing of investments and flexibility in future decision making this is especially relevant for research and development r d projects which require several stages of product development and multiple rounds of testing prior to releasing final products as a consequence the real options approach to cba has increasingly been used to evaluate private sector r d projects this paper advocates for the adoption of the real options approach in the evaluation of public investments in agricultural research and illustrates its practical utility with an assessment conducted by usaid to determine the economic viability of a proposed project to develop improved varieties of critical food security crops in uganda

a test of the hotelling valuation principle time series tests of the hotelling r percent rule for natural resource prices have not been strongly supportive but the tests and the data are subject to serious difficulties we propose here an alternative testing strategy based on another but less widely known implication of the hotelling model we test this implication which we call the hotelling valuation principle by regressing the market values of the reserves of a sample of u s domestic oiland gas producing companies on their estimated hotelling values we find that the estimated hotelling values account for a significant portion of the observed variations in market values and that the hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

returns on investments in energy saving technologies under energy price uncertainty in dutch greenhouse horticulture conventional net presentvalue calculations evaluating the profitabilityof investments in energy saving technologies indutch horticultural outlays predict a muchhigher rate of adoption of these technologiesthan is actually observed this paper tries toexplain this gap by applying a real optionsframework hurdle rates for investments in twotypes of energy saving technology are estimatedusing simulated future revenue streams givenuncertainty regarding energy prices and energytax policies hurdle rates found in this wayare on average about 1 76 times the hurdlerates that result from net present valuecalculations furthermore this paper tests thepredictive value of the theory by estimating alogit model this model relates the incidenceof having invested in an energy savingtechnology to the difference between the returnon investment and the hurdle rate thepredictive power turns out to be encouraging as the statistical tests indicate that higherhurdle rates tend to reduce rates of technologyadoption