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Investment Planning Under Uncertainty and Flexibility: The Case of a Purchasable Sales Contract

20 Pages Posted: 30 Jan 2008  

Oliver Musshoff

Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences

Norbert Hirschauer

Martin-Luther-Universität Halle-Wittenberg, Institut Agrar- und Ernährungswissenschaften

Abstract

Investment decisions are not only characterized by irreversibility and uncertainty but also by flexibility with regard to the timing of the investment. This paper describes how stochastic simulation can be successfully integrated into a backward recursive programming approach in the context of flexible investment planning. We apply this hybrid approach to a marketing question from primary production which can be viewed as an investment problem: should grain farmers purchase sales contracts which guarantee fixed product prices over the next 10 years? The model results support the conclusion from dynamic investment theory that it is essential to take simultaneously account of uncertainty and flexibility.

Suggested Citation

Musshoff, Oliver and Hirschauer, Norbert, Investment Planning Under Uncertainty and Flexibility: The Case of a Purchasable Sales Contract. Australian Journal of Agricultural and Resource Economics, Vol. 52, No. 1, pp. 17-36, March 2008. Available at SSRN: https://ssrn.com/abstract=1088506 or http://dx.doi.org/10.1111/j.1467-8489.2008.00414.x

Oliver Musshoff (Contact Author)

Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences ( email )

Berlin, D-10099
Germany

Norbert Hirschauer

Martin-Luther-Universität Halle-Wittenberg, Institut Agrar- und Ernährungswissenschaften ( email )

Karl-Freiherr-von-Fritsch-Str. 4
Halle (Saale), Sachsen-Anhalt 06120
Germany

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