Investment in farming under uncertainty and decoupled support: a real options approach

Abstract

Abstract We develop a real options model to assess the impact of decoupled payments on agricultural investments. The context that we are addressing is the one set by the Common Agricultural Policy where farmers are eligible for decoupled payments as long as their land is properly maintained. We show that decoupled payments are non-neutral with respect to choices concerning timing and capacity. We find that they (i) induce earlier investment with lower productive capacity; (ii) increase the value of the investment option associated with land and (iii) reduce the volatility of farm income. A numerical exercise complements our theoretical analysis.