A Model of Investment Under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water

Posted: 24 Apr 2002

See all articles by Janis M. Carey

Janis M. Carey

Colorado School of Mines - Division of Economics and Business

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics

Abstract

This article develops a stochastic dynamic model of irrigation technology adoption. It predicts that farms will not invest in modern technologies unless the expected present value of investment exceeds the cost by a potentially large hurdle rate. The article also demonstrates that, contrary to common belief, water markets can delay adoption. The introduction of a market should induce farms with abundant (scarce) water supplies to adopt earlier (later) than they would otherwise. This article was motivated by evidence that, contrary to NPV predictions, farms wait until random events such as drought drive returns significantly above costs before investing in modern irrigation technologies.

Suggested Citation

Carey, Janis M. and Zilberman, David, A Model of Investment Under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water. American Journal of Agricultural Economics, Vol. 84, pp. 171-183, 2002. Available at SSRN: https://ssrn.com/abstract=308799

Janis M. Carey (Contact Author)

Colorado School of Mines - Division of Economics and Business ( email )

1500 Illinois Street
Golden, CO 80401
United States
303-384-2077 (Phone)
303-273-3416 (Fax)

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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