Risk, uncertainty and pasture investment decisions

The private decisions of farmers to invest in new technologies interest economists because these decisions influence therate of farm productivity growth and the returns to public investment in agricultural research and development.Economic analysis of decisions to invest in new technologies on farms involves considering the effects of these decisionson the profitability and risk of the farm business. This is done routinely using whole-farm economic models andtechniques such as stochastic simulation. Such analysis can be used to predict the extent to which a technology is likelyto be adopted in equilibrium, when the consequences of adoption are known to all potential adopters.Until this equilibrium is reached, however, potential adopters of new technologies face uncertainty about theconsequences of adoption. This alters expectations about the effects on profitability and risk of adoption, and hencealters investment decisions. The resolution of uncertainty over time through learning is therefore a key determinant ofthe rate at which new technologies are adopted, and hence should be represented in dynamic economic models whichseek to explain these decisions.