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Abstract
The objective of this paper is to explore the potential of the real
options approach for analyzing farmers’ choice to switch from
conventional to organic farming. Understanding the determinants of
this decision is relevant in particular for agricultural policy makers
when predicting the response of farmers to support programs. After
a brief review of the existing literature on barriers to the adoption of
organic farming a theoretical model is presented that allows one to
incorporate two main features of the adoption decision, namely
irreversibility and uncertainty of the returns. The real options model
quantifies investment multiples that trigger the adoption of organic
farming. Compared with neoclassical models it suggests an inertia
of the respective farming type, i.e. economic hysteresis. In order to
find some empirical evidence for that hypothesis we utilize a switching
regression model has originally been developed to test for
market integration. The econometric model is then applied to aggregated
data of conventional and organic farms in Germany and Austria
spanning the period from 1982 until 2002. The empirical analysis
confirms the reluctance to adopt organic farming due to option-like
effects. We conclude that the incentives for adoption of organic
farming (e.g. higher prices, direct payments or income stabilization)
have to be increased if a higher share of this production type seems
desirable.