Murat Isik

Stochastic Technology, Risk Preferences, and Adoption of Site-Specific Technologies

This paper develops a model of farmer decision-making to examine the extent to which uncertainties about the performance of site-specific technologies (SSTs) and about the weather impact the value of these technologies. The model uses the jointly estimated risk and technology parameters to examine the impacts of SSTs on returns and nitrogen pollution. The availability of uncertain soil information and production uncertainty can lead risk-averse farmers to apply more fertilizers and generate more pollution. Ignoring the impact of uncertainty and risk preferences of farmers leads to a significant overestimation of the economic and environmental benefits of SSTs and underestimation of the required subsidy for inducing adoption of SSTs. The model that accounts for uncertainties about soil conditions and production as well as risk preferences of farmers provides an explanation for the low observed adoption rates of SSTs. Improvements in the accuracy of SSTs have the potential to increase the incentives for adoption.

An analysis of the impact of climate change on crop yields and yield variability

This paper develops an econometric model of stochastic production functions to quantify the impacts of climatic variables on the mean, variance, and covariance of crop yields. The estimates of the production function parameters and their elasticities are utilized to analyse the impacts of the projected climate change on agriculture. The results show that the climate change will have modest effects on the mean crop yields, but will significantly reduce the variance and covariance for most of the crops considered. The results have implications for allocations of agricultural land among crops and for crop production mix.

Cost-effectiveness of alternative green payment policies for conservation technology adoption with heterogeneous land quality

This paper quantitatively analyses the cost-effectiveness of alternative green payment policies designed to achieve a targeted level of pollution control by heterogeneous micro units. These green payment policies include cost-share subsidies that share the fixed costs of adoption of a conservation technology and/or input reduction subsidies to reduce the use of a polluting input. The paper shows that unlike a pollution tax that achieves abatement through three mechanisms, a negative extensive margin effect, a negative intensive margin effect and a technology switching effect, a cost-share subsidy and an input reduction subsidy are much more restricted in the types of incentives they provide for conservation of polluting inputs and adoption of a conservation technology to control pollution. Moreover, they may lead to varying levels of expansion of land under production. Costs of abatement with alternative policies and implications for production and government payments are compared using a simulation model for controlling drainage from irrigated cotton production in California, with drip irrigation as a conservation technology.

Environmental Regulation and the Spatial Structure of the U.S. Dairy Sector

Substantial public scrutiny about adverse environmental impacts of the dairy sector has resulted in increased environmental regulations. A behavioral model of location and production is developed to examine the impacts of environmental regulations, traditional location factors, and agglomeration economies on the spatial structure and geographical location of dairy production. The results show that counties in the states with more stringent environmental regulations tend to lose dairy inventories to those with less stringent policies. There are substantially meaningful spatial patterns of dairy production. Current dairy production levels are positively correlated while changes in production levels are negatively correlated across counties.

Investment in site‐specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy

This paper applies an option-pricing model to analyze the impact of uncertainty about output prices and expectations of declining fixed costs on the optimal timing of investment in site-specific crop management (SSCM). It also analyzes the extent to which the level of spatial variability in soil conditions can mitigate the value of waiting to invest in SSCM and influence the optimal timing of adoption and create a preference for custom hiring rather than owner purchase of equipment. Numerical simulations show that while the net present value (NPV) rule predicts that immediate adoption is profitable under most of the soil conditions considered here, recognition of the option value of investment indicates that it is preferable to delay investment in SSCM for at least 3 years unless average soil quality is high and the variability in soil quality and fertility is high. The use of the option value approach reveals that the value of waiting to invest in SSCM raises the cost-share subsidy rates required to induce immediate adoption above the levels indicated by the NPV rule.

The Impact of Exchange Rate Variability on Agricultural Exports of Developing Countries

Abstract This paper examines the impact of exchange rate and its volatility on the Turkish agricultural exports in the framework of error-correction model. The error correction model results indicate that except a few countries, the exchange rate and its variability do not have significant impact on Turkish exports of dried figs, grapes and tobacco. Thus, policies designed to increase the export level of Turkish agricultural products by incorporating weak Turkish lira against other currencies are not likely to be effective. The policy makers, therefore, should take into account the ineffectiveness of exchange rate on stimulating agricultural exports in their new policy designs.

An experimental analysis of impacts of uncertainty and irreversibility on willingness-to-pay

Several empirical studies demonstrated large discrepancies between willingness-to-accept and willingness-to-pay measures. This paper uses an experimental method to determine the extent to which uncertainty about the value of the environmental improvement and the irreversibility of the decision affects the willingness-to-pay to preserve an endangered species. The results show that risk preferences, uncertainty about environmental improvements, and irreversibility significantly influence the willingness-to-pay measure. These results have implications for design and implementation of contingent valuation surveys.

Implications of alternative stochastic processes for investment in agricultural technologies

Considerable research and analyses exist concerning applying the option value to investment decisions. A model has been developed to examine the extent to which two alternative stochastic processes, geometric Brownian motion (GBM) and mean reversion, have impacts on investment decisions. The results show that the impacts of uncertainty and irreversibility on investment decisions differ under GBM and mean reversion. Studies that assume the returns evolve as GBM without drift would overestimate the value of the investment opportunity, while they would underestimate it if they assume the returns follow GBM with drift. The magnitude of error one could make by using GBM when the returns follow mean reversion is high.

Incorporating decision makers' risk preferences into real options models

This study develops a framework to link the expected utility analysis to real options models in order to capture the joint effects of risk aversion and irreversibility. It aims at modifying the theory of investment under uncertainty by incorporating decision makers’ risk preferences and allows explicitly analysing the impacts of risk aversion, uncertainty and irreversibility on decisions such as investment and resource allocations. It addresses the shortcomings of the commonly used expected utility and investment under uncertainty models by generalizing the theory of irreversible investment to allow for risk-averse investors. It was found that uncertainty, irreversibility and risk aversion are important determinants of the optimal timing of irreversible decisions. Ignoring risk preferences in real options models would lead to overestimation or underestimation of the magnitude of investments.

Uncertainty and spatial variability: incentives for variable rate technology adoption in agriculture

This paper develops a behavioral model of farmer decision making to analyze the incentives for adoption of a technology that provides information about spatial variability in nutrient availability and enables variable rate application of fertilizers. It examines the implications of uncertainty about the accuracy of the technology on input application and adoption decisions. Risk aversion and uncertainty can lead to the imposition of a risk premium on input use, which create incentives to over or under apply fertilizers. This influences not only the incentives to adopt the technology but also the impact of adoption on pollution. High spatial variability mitigates the disincentives for adoption even if fixed costs are high and farm size is small but the extent to which this occurs depends on the degree of risk aversion and uncertainty. These results have implications for the design and effectiveness of cost–share subsidies to induce adoption and reduce over application of fertilizers.