The Adoption and Diffusion of GM Crops in USA: A Real Option Approach

Abstract

The paper aims at modeling adoption and diffusion decisions of farmers towards genetically modified crops under a real option framework. Modern GM crops help farmers to resolve two main sources of uncertainty: output uncertainty and input uncertainty. Those crops represent a revolutionary form of farming compared to the technology adoption studied in the literature in the late ‘70s-early ‘80s. The paper develops a theoretical model of adoption and diffusion of new GM crops under uncertainty and irreversibility. We test our theoretical predictions using data from 2000 to 2008 of a panel dataset constructed for 13 states of USA involved into the production of 4 different GM crop. These conclusions may appear to contradict the general perception of a delayed penetration for the GM crops, whose success seems to be retarded by lack of information, mistrust and an exaggerated perception of risks. GM crops tend to be invasive, in that their short term profitability is so high as compared with the investment needed, that once the hump of uncertainty is overcome, they operate a veritable takeover of agriculture.

Keywords: Adoption, Diffusion, Uncertainty, Irreversibility, Real Option