FG 497: Structural Change and Transition in Agriculture - TP 1: Hysteresis of Structural Change in Agriculture (II)

The structure of the agricultural sector is known for its slow adaptation to changing conditions in the agricultural sector and the economy in general. This characteristic of the agricultural sector has been ascribed to "path dependencies" or "hysteresis" caused by non reversibility. Although the phenomena has been described for a long time, a coherent theory explaining it is missing. In this context, the new investment theory (real options) combines "non-reversibility" (sunk costs), uncertainty and flexibility in a cohesive and dynamic model. The basic idea of this model is, that the threshold for investments and disinvestments is higher than it would be expected with the traditional investment theory. Therefore, the real options approach may explain economic hysteresis. The purpose of this project is to verify empirically the potential of the new investment theory in terms of explaining economic hysteresis. Econometric "adjustment-cost-models" are used and extended, so that hysteresis caused by real options would be verified. These "adjustment-cost-models" will be applied to data from farms investing in animal production with the objective of explaining the investment and disinvestments decisions and pinpointing the meaning of hysteresis.