A stochastic dynamic programming analysis of farmland investment and financial management

Author Affiliation

Dr. Heman Das Lohano is Associate Professor at Institute of Business Administration (IBA), Karachi

Faculty / School

Faculty of Business Administration (FBA)

Department

Department of Economics

Was this content written or created while at IBA?

Yes

Document Type

Article

Source Publication

Canadian Journal of Agricultural Economics

ISSN

0008-3976

Disciplines

Agricultural Economics | Econometrics | Economics | Environmental Sciences | Finance

Abstract

This paper develops a multiperiod investment portfolio model that includes risky farmland, risky and risk-free nonfarm assets, and debt financing on farmland in the presence of transaction costs and credit constraints. The model is formulated as a stochastic continuous-state dynamic programming problem, and is solved numerically for Southwestern Minnesota, USA. Results show that optimal investment decisions are dynamic and take into account the future decisions due to uncertainty, partial irreversibility, and the option to wait. The optimal policy includes ranges of inaction, states where the optimal policy in the current year is to wait. The risk-averse farmer makes a lower investment in risky farmland reflecting risk-avoiding behavior. We find that, in addition to risk aversion, the length of the planning horizon affects risk-avoiding behavior in investment decisions. In contrast to a static model, changes in the riskiness of returns affect optimal investment decisions even when the decision maker is risk neutral. Finally, we find that higher debt financing on farmland is optimal when risky nonfarm assets can be included in the optimal investment portfolio and that the probability of exiting farming increases with the risky nonfarm investment.

Indexing Information

HJRS - X Category, Scopus, Web of Science - Science Citation Index Expanded (SCI), Web of Science - Social Sciences Citation Index (SSCI)

Journal Quality Ranking

Impact Factor: 2.455

Publication Status

Published

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