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Institutional risks and investment decisions
This thesis employs real option theory and identifies the effects of institutional risk caused by frequent policy reforms on investment and disinvestment decisions in Swiss agriculture.
Context:
Due to frequent agricultural policy reform steps in Switzerland, farmer face a high degree of uncertainty with respect to future market and support conditions as well as environmental obligations. Real option theory suggests that due to such uncertainty, investment decisions might be postponed. Thus, technological progress is potentially hampered. Moreover, such uncertainty can reduce the degree and speed of dis-investment, comprising leaving unprofitable activities. Thus, also desired levels of structural change are affected. Due to these mechanisms, a too high frequency of reform steps might thus reduce the effectiveness and efficiency of agricultural policy.
Research Questions:
- Does the current design of agricultural policy reform steps affects investment decision taken in Swiss agriculture?
- Can real option theory help to explain farm-level investment decisions?
- How does farmers risk preferences affect investment decisions?
Methods:
Investment analysis under uncertainty, surveys or interviews, econometric analysis
Literature:
El Benni, N. (2013), Der Einfluss von Direktzahlungen auf betriebswirtschaftliche Entscheidungen – eine Befragung von landwirtschaftlichen Beratern, Bericht angefertigt für das Bundesamt für Landwirtschaft (BLW), ETH Zürich.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton university press.
Pieralli, S., Hüttel, S., & Odening, M. (2014). Abandonment of milk production under uncertainty and inefficiency: The case of West German farms. In 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota (No. 170236). Agricultural and Applied Economics Association.
Tauer, L. W. (2006). When to get in and out of dairy farming: a real option analysis. Agricultural and Resource Economics Review, 35(2), 339.
Context: Due to frequent agricultural policy reform steps in Switzerland, farmer face a high degree of uncertainty with respect to future market and support conditions as well as environmental obligations. Real option theory suggests that due to such uncertainty, investment decisions might be postponed. Thus, technological progress is potentially hampered. Moreover, such uncertainty can reduce the degree and speed of dis-investment, comprising leaving unprofitable activities. Thus, also desired levels of structural change are affected. Due to these mechanisms, a too high frequency of reform steps might thus reduce the effectiveness and efficiency of agricultural policy.
Research Questions: - Does the current design of agricultural policy reform steps affects investment decision taken in Swiss agriculture? - Can real option theory help to explain farm-level investment decisions? - How does farmers risk preferences affect investment decisions?
Methods: Investment analysis under uncertainty, surveys or interviews, econometric analysis
Literature: El Benni, N. (2013), Der Einfluss von Direktzahlungen auf betriebswirtschaftliche Entscheidungen – eine Befragung von landwirtschaftlichen Beratern, Bericht angefertigt für das Bundesamt für Landwirtschaft (BLW), ETH Zürich.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton university press.
Pieralli, S., Hüttel, S., & Odening, M. (2014). Abandonment of milk production under uncertainty and inefficiency: The case of West German farms. In 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota (No. 170236). Agricultural and Applied Economics Association.
Tauer, L. W. (2006). When to get in and out of dairy farming: a real option analysis. Agricultural and Resource Economics Review, 35(2), 339.
This thesis should use concepts of real option theory to derive testable hypotheses how the subjective uncertainty with respect to the current design of agricultural policy reform steps affects investment and disinvestment decisions taken in Swiss agriculture. Based on this background, interviews or a survey should be conducted with farmers. The goal of this analysis should be to match subjective perception of these risks, risk aversion and the information whether investment decision taken or postponed.
This thesis should use concepts of real option theory to derive testable hypotheses how the subjective uncertainty with respect to the current design of agricultural policy reform steps affects investment and disinvestment decisions taken in Swiss agriculture. Based on this background, interviews or a survey should be conducted with farmers. The goal of this analysis should be to match subjective perception of these risks, risk aversion and the information whether investment decision taken or postponed.