Optimal Timing of Farmland Investment - An Experimental Study on Farmers' Decision Behavior -

Replaced with revised version of paper 5/26/11.Experimental Economics, Investment, Real Options, Agribusiness, Agricultural Finance, Farm Management, Financial Economics, Institutional and Behavioral Economics, Risk and Uncertainty, C91, D81, D92,

Closing down the Farm: An Experimental Analysis of Disinvestment Timing

Agrarian structures are often characterized by some kind of economic inertia. It is particularly puzzling why unprofitable farms persist over time instead of being sold. In this paper we analyze the exit decision of farmers using the real options approach. The validity of the real options theory is assessed by means of laboratory experiments. Our results show that real options models are able to predict actual disinvestment decisions better than traditional investment theory. Nevertheless, the observed disinvestment reluctance was even more pronounced as predicted by theory. This finding suggests the inclusion of bounded rationality into normative disinvestment models.Disinvestment, Real Options, Experimental Economics, Agricultural Finance, Farm Management, C91, D81, D92,

ZUM DESINVESTITIONSVERHALTEN LANDWIRTSCHAFTLICHER UNTERNEHMER: ERGEBNISSE EINER EXPERIMENTELLEN UNTERSUCHUNG

Desinvestition, Realoptionsansatz, Experimentelle Ökonomik, Agricultural Finance, Farm Management, Financial Economics, Research Methods/ Statistical Methods,

Optimal Timing of Farmland Investment - An Experimental Study on Farmers' Decision Behavior -

Optimal timing of farmland investment represents fundamental decisions for agricultural entrepreneurs. It is known that the land price value is significantly higher than the expected present value of expected future gains. In this paper we experimentally analyze the investment behavior of real farmers and contrast the observed investment decisions with theoretical benchmarks of the classical investment theory and the Real Options Approach. Furthermore, we investigate framing effects. Our results show that the framing of the investment situation has no significant influence on the decision behavior in the experiment. Moreover, the investment behavior of farmers approximates the predictions of the Real Options Approach if they are given an equitable chance to learn from personal experience

Impact of Price Floors: A Real Options Based Experimental Approach

In order to stimulate investments, agricultural policies frequently use price floors, which guarantee a price above a certain limit. In some cases, however, a price floor does not have the desired effects. In this study, we experimentally analyse differences in the investment behaviour with respect to the presence of a price floor and compare the actual investment behaviour to normative benchmarks of the net present value and the real options approach. Furthermore, we look at treatment order and learning effects. The results show that the price floor has no significant impact on the decision behaviour of participants, whereas the effects of treatment order were statistically significant. Regarding the analysis of policy impacts, the latter result shows that the investment reluctance arising from an abolishment of a price floor is stronger than the investment stimulation arising from the introduction of a price floor. Consequently, neither the net present value nor the real options approach is appropriate to predict the investment behaviour in general. Nevertheless, we found out that the predictions of the real options approach enable an approximation of the participants’ investment behaviour if the individuals have an adequate chance to learn from personal experience

Comparison of the Investment Behavior of German and Kazakhstani Farmers: an Experimental Approach

Kazakhstan and Germany have different development levels of the agricultural sectors. One of the explanations for this fact might be the different investment behavior of farmers in the two countries. We experimentally analyze whether the investment behavior of farmers is consistent with the normative benchmarks of the net present value criterion or the real options approach. Furthermore, we experimentally compare the investment behavior of farmers in the two countries in an agricultural and a non-agricultural treatment. In addition, farmers were confronted with the two treatments in a different order. Our results show that both theories cannot exactly predict the investment behavior of farmers. Farmers invest later than the net present value criterion suggests and earlier than the real options approach suggests. However, German farmers invest later than Kazakhstani farmers, which mean that the investment behavior of German farmers is more in accordance with the superior real options approach. Therefore, the different investment behavior might partly be an explanation for different development levels of the agricultural sectors of the two countries. Moreover, results are independent from the framing of an agricultural and a non-agricultural treatment. However, farmers learn from their former investment decisions and consider the value of waiting over time

Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach

The agricultural sectors of Kazakhstan and Germany are at different development levels. One possible explanation for this might be the different investment behavior of farmers. We experimentally analyze whether the investment behavior of farmers is consistent with the normative benchmarks of the net present value criterion or the real options approach. Furthermore, we experimentally compare the investment behavior of farmers in the two countries in an agricultural and a non-agricultural treatment. In addition, farmers were confronted with the two treatments in a different order. Our results show that both theories cannot exactly predict the investment behavior of farmers. Farmers invest later than the net present value criterion suggests and earlier than the real options approach suggests. However, German farmers invest later than Kazakhstani farmers, which mean that the investment behavior of German farmers is closer to the superior real options approach. Therefore, the different investment behavior might partly be an explanation for different development levels of the agricultural sectors of the two countries. Moreover, results are independent from the framing of an agricultural and a non-agricultural treatment. However, farmers learn from their former investment decisions and consider the value of waiting over time

Experimental examination of land investment decisions with volatile returns A comparison between Kazakhstani and German farmers

Kazakhstan and Germany have different development levels of the agricultural sector. One of the explanations for this fact might be the different investment behavior of farmers in the two countries. In this study, we experimentally compare the investment behavior of farmers in the two countries in a farmland investment treatment and a coin tossing game investment treatment. In addition, farmers were confronted with the two treatments in a different order. Results demonstrate that German farmers are more reluctant to make investment than Kazakhstani farmers. Moreover, results are independent from the framing of a farmland investment and a coin tossing game investment treatment. Furthermore, the investment behaviors of farmers were contrasted with normative benchmark of the classical investment theory and the real options theory. Our results show that both theories cannot exactly explain the investment behavior of farmers. However, farmers learn from former investment behavior and consider the value of waiting over time

ERMITTLUNG DER INDIVIDUELLEN RISIKOEINSTELLUNG: VERGLEICH VERSCHIEDENER METHODEN UND PERSONENGRUPPEN

Viele Untersuchungen zur Quantifizierung der individuellen Risikoeinstellung von Probanden zeigen, dass verschiedene Methoden zur Messung der Risikoeinstellung zu unterschiedlichen Ergebnissen führen können. Zusätzliche Zweifel bezüglich der Zuverlässigkeit der Ergebnisse resultieren daraus, dass vielfach mit Convenience Groups, wie z. B. Studierenden oder Unternehmern in Entwicklungsländern, gearbeitet wird. Vor diesem Hintergrund vergleichen wir systematisch verschiedene Methoden, um herauszufinden, wie stark die Methodenwahl die Ergebnisse beeinflusst. Außerdem vergleichen wir die Risikoeinstellung deutscher Landwirte mit der von deutschen Studierenden und der von kasachischen Landwirten, um zu überprüfen, ob über die Risikoeinstellung von Convenience Groups die Verteilung der Risikoeinstellung landwirtschaftlicher Unternehmer in Industrieländern bestimmt werden kann. Die Risikoeinstellung, die mit den einzelnen Methoden bei den deutschen Landwirten gefunden wurden, weisen über alle Erhebungsmethoden hinweg nur leicht positive Korrelationen auf. Signifikante Unterschiede im Antwortverhalten der deutschen Studierenden und der deutschen Landwirte zeigen, dass es nicht ohne Weiteres möglich ist, Rückschlüsse von Studierenden auf Landwirte zu ziehen. Signifikante Ähnlichkeiten konnten bezüglich des Antwortverhaltens bei den kasachischen und deutschen Landwirten identifiziert werden

Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach

The agricultural sectors of Kazakhstan and Germany are at different development levels. One possible explanation for this might be the different investment behavior of farmers. We experimentally analyze whether the investment behavior of farmers is consistent with the normative benchmarks of the net present value criterion or the real options approach. Furthermore, we experimentally compare the investment behavior of farmers in the two countries in an agricultural and a non-agricultural treatment. In addition, farmers were confronted with the two treatments in a different order. Our results show that both theories cannot exactly predict the investment behavior of farmers. Farmers invest later than the net present value criterion suggests and earlier than the real options approach suggests. However, German farmers invest later than Kazakhstani farmers, which mean that the investment behavior of German farmers is closer to the superior real options approach. Therefore, the different investment behavior might partly be an explanation for different development levels of the agricultural sectors of the two countries. Moreover, results are independent from the framing of an agricultural and a non-agricultural treatment. However, farmers learn from their former investment decisions and consider the value of waiting over time