Modeling structural change in agriculture under competition between heterogenous firms, uncertainty and different market interventions

• Applicant: Professor Dr. Jan-Henning Feil
• Subject Area: Agricultural Economics, Agricultural Policy, Agricultural Sociology
• Term: from 2014 to 2018
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 265161039

In consequence of strong changes in general economic conditions, adjustments in the agricultural sector can be expected. To date, however, important aspects with regard to the analysis of structural change in agriculture in general, and investment and disinvestment decisions in specific are not considered in the literature. There is, for example, no model which is capable of analyzing investment and disinvestment decisions of heterogeneous firms under consideration of real options effects, that is, under simultaneous consideration of uncertainty of the cash flows, irreversibility and temporal flexibility, in a competitive environment. Thus, there exists a risk that the adjustment behavior of farm firms is forecasted in an inaccurate way within policy impact analyzes. Furthermore, bounded rationality of agricultural decision makers, which can often be observed in reality, is mostly disregarded by existing policy impact analyzes. Therefore, the objective of this project is to develop an agent-based real options model, which integrates the previously mentioned aspects and allows for more accurate forecasts of the adjustment behavior of farmers and its implications for structural change. With regard to the objective, the following concrete research questions shall be answered:1. How can investment and disinvestment decisions of heterogeneous firms and their interactions in competitive markets be simultaneously modeled within the real options context? 2. How can different market interventions, which are relevant for the agricultural sector, e.g. tradable production quotas or greenhouse gas emission rights, be integrated in real options models, which explicitly consider heterogeneous decision makers? Which implications arise from the implementation, increased use, reduction or abolishment of these interventions for structural change in agriculture? 3. How can bounded rationality of agricultural entrepreneurs, which has been proven in previous studies, be quantified and processed in models, which analyze the firm level adjustment behavior to changes in the economic environment?

• DFG Programme: Research Grants