The Economic Threshold with a Stochastic Pest Population: a Real Option Approach

Using real options, we formulate an optimal stopping model for applying pest control measures when the density of a pest population fluctuates randomly. This model is applied to the control of a foliar pest of apples (the European Red Mite) via a pesticide, and solved numerically by a boundary-tracking algorithm. We find that the pest density above which the pesticide should be applied increases with the pest density volatility. A sensitivity analysis highlights the importance of several biological parameters. Incorporating pest randomness into simple decision rules may thus help reduce the overall amount of chemicals applied to soils and crops.