Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –

In agriculture, long-term decisions are usually made in an environment which is almost completely dynamic. For example, uncertainty arises from weather and climatic conditions. (Dis)investment in irrigation technology on farms has become more prominent over the past decade. The use of irrigation has become crucial in many parts of the world as an adaptation strategy to climate change. The purpose of this study is to test whether the Real Options Approach can help to explain why farmers often choose to postpone (dis)investments that appear to be immediately profitable. We combine investment and disinvestment decisions in one experiment using a “within-subject” design and carrying out a comparative analysis between the Net Present Value approach and the Real Options Approach in order to ascertain which of the methods provides a better prediction of the investment and disinvestment behavior of farmers. In our study, we consider a simple optimal stopping (dis)investment problem in which farmers can invest in as well as abandon irrigation technology. Our results show that both theories do not explain the observed (dis)investment behavior exactly. However, some evidence was found that the Real Options Approach provides a better prediction of the (dis)investment behavior of farmers than the Net Present Value approach. Moreover, we find that farmers learn from repeated investment decision-making and consider the value of waiting over time, whereas in disinvestment situations, farmers exaggerate the option to delay. We also find that farmers demonstrate different (dis)investment behavior depending on the order in which they were faced with the investment and disinvestment treatments.