Investment Planning Under Uncertainty and Flexibility: The Case of a Purchasable Sales Contract
Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences
Martin-Luther-Universität Halle-Wittenberg, Institut Agrar- und Ernährungswissenschaften
Australian Journal of Agricultural and Resource Economics, Vol. 52, No. 1, pp. 17-36, March 2008
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.
Number of Pages in PDF File: 20
Date posted: January 30, 2008