The Effects of Different Political Schemes on the Willingness to Invest, Firm Profitability and Economic Efficiency in the Dairy Sector - An Agent-Based Real Options Approach-

In recent years, the dairy sector has been exposed to strong changes in general conditions and extreme fluctuations in milk prices. Farmers and lobbyists have therefore asked politicians for additional market regulation. In this paper an agent-based real options market model is developed, which allows the analysis of the effects of different political schemes on the willingness to invest, firm profitability and economic efficiency in the dairy sector. The model results show that political schemes generally increase the willingness to invest in competitive markets under consideration of real options effects. However, they do not offer any substantial financial benefits to the producers and can cause a significant reduction in welfare. Furthermore, the results suggest that investment subsidies are preferable to lower price limits because the welfare is less reduced under the same stimulation of the willingness to invest.