Policy Impact Analysis on Investments and Disinvestments under Competition: A Real Options Approach

In consequence of changes in general conditions, a higher level of investments and disinvestments in agriculture can be expected. To date, however, there are no policy impact analyses on both investments and disinvestments in competitive agricultural markets in a dynamic-stochastic context. This paper aims to develop a conceptual real options market model, which allows the impact assessment of different political schemes on investment and disinvestment thresholds and the sectoral welfare. Exemplarily, the effects of price floors, investment subsidies and production ceilings are analysed. The results show that the consideration of limited reversibility, that is disinvestments, is of relevance as it can impact the assessment of specific policies