Author
Feng Song, Jinhua Zhao (jzhao@msu.edu) and Scott Swinton
No 56195, Staff Papers from Michigan State University, Department of Agricultural, Food, and Resource Economics
Abstract: We study a farmer’s decision to convert traditional crop land into growing dedicated energy crops, taking in account sunk conversion costs, uncertainties in traditional and energy crop returns, and learning. The optimal decision rules differ significantly from the expected net present value rule, which ignores learning, and from real option models that allow only one way conversions into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn-soybean rotations and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass reduces proportions of land in switchgrass in the long run.
Keywords: real options; irreversibility; sunk costs; land conversion; biofuel; cellulosic biomass; dynamic modeling; stochastic process; biofuel policy; Land Economics/Use; Resource /Energy Economics and Policy; Risk and Uncertainty; Q42; Q24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-ene
Date: 2009-12
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
http://purl.umn.edu/56195 (application/pdf)
Related works:
Journal Article: Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility (2011)
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Persistent link: http://EconPapers.repec.org/RePEc:ags:midasp:56195
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For further details log on website :
http://econpapers.repec.org/paper/agsmidasp/56195.htm
Feng Song, Jinhua Zhao (jzhao@msu.edu) and Scott Swinton
No 56195, Staff Papers from Michigan State University, Department of Agricultural, Food, and Resource Economics
Abstract: We study a farmer’s decision to convert traditional crop land into growing dedicated energy crops, taking in account sunk conversion costs, uncertainties in traditional and energy crop returns, and learning. The optimal decision rules differ significantly from the expected net present value rule, which ignores learning, and from real option models that allow only one way conversions into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn-soybean rotations and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass reduces proportions of land in switchgrass in the long run.
Keywords: real options; irreversibility; sunk costs; land conversion; biofuel; cellulosic biomass; dynamic modeling; stochastic process; biofuel policy; Land Economics/Use; Resource /Energy Economics and Policy; Risk and Uncertainty; Q42; Q24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-ene
Date: 2009-12
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
http://purl.umn.edu/56195 (application/pdf)
Related works:
Journal Article: Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text
Persistent link: http://EconPapers.repec.org/RePEc:ags:midasp:56195
Access Statistics for this paper
More papers in Staff Papers from Michigan State University, Department of Agricultural, Food, and Resource Economics Contact information at EDIRC.
Series data maintained by AgEcon Search (aesearch@umn.edu).
For further details log on website :
http://econpapers.repec.org/paper/agsmidasp/56195.htm
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