UW-Madison UW-Madison

Staff Paper No. 547 - Abstract

A Real Options Framework for Analyzing Program Participation as Human Capital Investments: The Case of the Average Crop Revenue Election (ACRE) Program

Paul D. Mitchell [pdmitchell@wisc.edu]
Roderick M. Rejesus [rod_rejesus@ncsu.edu]
Keith H. Coble [coble@agecon.msstate.edu]
Thomas O. Knight [tom.knight@ttu.edu]

Staff Paper No. 547, August 2010, 38p.


We develop a real options framework to model producer participation in a subsidy program as a human capital investment to learn how the stochastic subsidy affects returns and how to adapt production activities to new program incentives, formally linking the framework to a multinomial logit specification for empirical applications. Analysis of farmer intentions for participation in the ACRE program created by the 2008 Farm Bill finds that reluctance to participate was driven largely by risk aversion and perceptions about income risk from yield and price variability, consistent with the theory that uncertainty creates an option value discouraging human capital investments.
Last updated on Wed, Aug 4, 2010 3:29pm