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 uncerta inty about output prices and expectations of declining fixed costs on the o ptimal timing of investment in site-specific crop management (SSCM). It als o analyzes the extent to which the level of spatial variability in soil con ditions can mitigate the value of waiting to invest in SSCM and influence t he optimal timing or adoption and create a preference for custom hiring rat her than owner purchase of equipment. Numerical simulations show that while the net present value (NPV) rule predicts that immediate adoption is profi table under most of the soil conditions considered here, recognition of the option value of investment indicates that it is preferable to delay invest ment in SSCM for at least 3 years unless average soil quality is high and t he 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 th e levels indicated by the NPV rule. (C) 2000 Elsevier Science B.V. All ligh ts reserved.