Optimal investment decisions in lice-fighting technologies: A case study in Norway

Abstract

The Norwegian salmon farming industry is currently facing significant obstacles to future growth. The major challenge is posed by the high level of sea lice in the sea nets at the salmon farms. At the moment both salmon farmers and the supplying industries are working on developing ways to deal with the sea lice problem so that the industry can continue the growth observed during the last decade. This work attempts to fill the lack of investment studies dealing with risk management related to the lice challenge, as well as analysis of investments in new technologies used to abate this problem. Specifically, we address a two-fold investment problem of an aquaculture firm. First, we find the optimal adoption timing of disruptive innovation that has the potential to offer a long-term solution to the lice problem and is subject to uncertain technology development. Second, we find the optimal investment amount in temporary lice-fighting measures. Our results indicate that the high investment cost causes the firm to wait relatively long before adopting the disruptive technology. Consequently, it invests a relatively large amount in short-term methods.