THE ECONOMIC THRESHOLD WITH A STOCHASTIC PEST POPULATION: A REAL OPTIONS APPROACH

Using real options, this paper formulates an optimal stopping model for applying pest control measures when the density of a pest population varies randomly. A delay between successive pesticide applications is introduced to analyze the farmer’s expected marginal cost of reentry. This model is applied to the control of a foliar pest of apples via a pesticide, and solved numerically. A sensitivity analysis shows that the pest density that should trigger pesticide use can vary significantly with the pest density volatility. Incorporating pest randomness into simple decision rules may thus help better manage the chemicals applied to soils and crop