The impact of price floors on farmland investments: a real options based experimental analysis

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Abstract:

Price floors are a common instrument for market intervention to stimulate investments. In some cases, it can be observed that a price floor does not have the stimulating effect. We experimentally analyse the investment behaviour of students who take the role of farmers. The experiment considers an investment problem under uncertainty in a ‘with price floor’ and a ‘no price floor’ treatment, stylizing a decision to take an ongoing farmland investment option. We compare the actual investment behaviour with normative benchmarks of the net present value and the real options approach. Furthermore, we look at order and learning effects. The results show that the price floor has no significant impact on the willingness to invest, whereas the effects of order were statistically significant. The investment reluctance arising from an abolishment is stronger than the investment stimulation arising from the introduction of a price floor. Furthermore, neither the net present value nor the real options approach is appropriate to predict the investment behaviour in general. Nevertheless, the predictions of the real options approach enable an approximation of the participants’ investment behaviour if the individuals have an adequate chance to learn from personal experience.

Keywords: C91; D81; E61; decisions behaviour; experimental economics; farmland investment; price floors; real options

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2013.806783

Affiliations: Department of Agricultural Economics and Rural Development, Georg-August-University Goettingen, Goettingen, Germany

Publication date: December 1, 2013

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