Spiegel, Alisa: Investment and land-use decision under consideration of uncertainty. - Bonn, 2018. - Dissertation, Rheinische Friedrich-Wilhelms-Universität Bonn.
Online-Ausgabe in bonndoc:
author = {{Alisa Spiegel}},
title = {Investment and land-use decision under consideration of uncertainty},
school = {Rheinische Friedrich-Wilhelms-Universität Bonn},
year = 2018,
month = sep,

note = {Investment and land use decisions pre-determine the distribution of other farm resources and thus constitute core farm activities. Investments at the farm level often include sunk costs, risks, returns-to-scale, investment options of predefined sizes, and multiple stages of investment. Considering these factors is crucial for improving understanding of the economic incentives and disincentives to invest at the farm level and appropriate design of related policy. However, existing numerical methods of investment analysis fail to capture all the listed factors simultaneously due to explicit or implicit restrictions.
This thesis narrows this methodological gap by developing a numerical method to analyze investment options at the farm level. The method is applied to decision making with regard to investing in a perennial energy crop production system—short-rotation coppice (SRC)—on a representative farm in Germany. The investment option implies all of the attributes listed above. Furthermore, empirical analysis of SRC adoption exclusively for biomass production is relevant in light of increasing renewable energy demand. SRC is characterized by multiple environmental benefits relative to other forms of agriculture and offers a more efficient energy generation option compared to annual bioenergy crops. For a farmer, SRC is advantageous due to low input requirements, potential natural hedging, and broad political support. In addition, timing of SRC biomass production is not predetermined and to some extent flexible, such that there is potential to adjust any decision based on how future conditions evolve. Yet, farmers in the European Union have been reluctant to adopt SRC and the literature provides no clear explanation. The empirical aim of this research is hence to quantify the economic incentives and disincentives for German farmers to adopt SRC under consideration of risk levels and preferences, and to provide relevant policy recommendations.
To simulate SRC introduction at the farm level, I design a stochastic-dynamic model and develop a novel solution approach that combines Monte Carlo simulation, scenario tree reduction, and stochastic programming. A scenario tree reduction technique uses draws obtained with Monte Carlo simulation and outputs a scenario tree, which is then combined with a farm-level model. Restrictive assumptions commonly made in the literature are relaxed. In particular, a farmer can either decide to introduce SRC immediately or else postpone the decision; also, coppicing intervals and the total lifetime of SRC plantation are flexible. Potential adoption of SRC is formulated as an American compound option, where planting, each coppicing or biomass harvest, and final reconversion back to annual crop production are stages of the compound option. SRC competes for limited farm resources with annual crop production, while returns from both SRC and annual crops are stochastic. The outcome hence includes not only optimal timing, but also optimal scale of SRC introduction. Risk aversion is introduced using the concept of stochastic dominance. The method developed and demonstrated here is transparent, allows relaxing assumptions, and does not hamper computational capacity. It is a rather general instrument for the analysis of long-term investment options under conditions of uncertainty and risk preferences, and hence is of interest far beyond the specific context described in this case study.
Empirical results demonstrate that SRC cannot compete with annual crop production under current market conditions and that individual farmers wait for a certain trigger or state-of-nature in order to adopt SRC. A risk-averse farmer might decide to introduce SRC earlier, though at a smaller scale, in order to take advantage of the potential natural hedging effect. The results indicate that some level of risk is associated with increased SRC introduction due to the benefits associated with the managerial flexibility inherent to SRC cultivation. In particular, flexible timing with respect to establishment, coppicing, and final reconversion allows farmers to exploit positive risks and mitigate negative ones. In this regard, policy instruments intended to reduce or eliminate risk associated with SRC cultivation were found to be inefficient. In contrast, currently implemented policies that help reduce the sunk costs and opportunity costs of SRC introduction are more efficient at promoting adoption, although the results suggest that such instruments need to be modified in order to be more effective, because otherwise farmers are more likely to postpone making decisions about SRC introduction. The empirical results of the ex-ante analysis conducted here should serve as a basis for higher level analyses and related policy recommendations.},

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