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Inertia in disinvestment decisions: experimental evidence

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  • Oliver Musshoff
  • Martin Odening
  • Christian Schade
  • Syster Christin Maart-Noelck
  • Serena Sandri

Abstract

In this paper we analyse the timing of disinvestment decisions by applying a real options approach to explain the experimentally observed disinvestment behaviour of agricultural entrepreneurs. Within this framework the tendency to postpone exit and termination choices can be rationalised. The validity of the real options theory is assessed by means of economic experiments. Our results show that real options models can predict actual disinvestment decisions better than traditional investment theory. Nevertheless, the reluctance to disinvest observed in the experiments was even more pronounced than that predicted by the theory. This finding suggests that non-monetary aspects such as emotions, attachment to farming and different facets of psychological inertia should be incorporated into disinvestment models. , Oxford University Press.

Suggested Citation

  • Oliver Musshoff & Martin Odening & Christian Schade & Syster Christin Maart-Noelck & Serena Sandri, 2013. "Inertia in disinvestment decisions: experimental evidence," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 40(3), pages 463-485, July.
    • Handle: RePEc:oup:erevae:v:40:y:2013:i:3:p:463-485
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    File URL: http://hdl.handle.net/10.1093/erae/jbs032
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    Cited by:

    1. Diekmann, Anton & Wolbert-Haverkamp, Matthias & Mußhoff, Oliver, 2014. "Die Bewertung der Umstellung einer einjährigen Ackerkultur auf den Anbau von Miscanthus – Eine Anwendung des Realoptionsansatzes," Department of Agricultural and Rural Development (DARE) Discussion Papers 260812, Georg-August-Universitaet Goettingen, Department of Agricultural Economics and Rural Development (DARE).
    2. Grüner, S. & Hirschauer, N. & Mußhoff, O., 2015. "Potenzial verschiedener experimenteller Designs für die Politikfolgenabschätzung," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 50, March.
    3. Brown, T. & Panibratov, A., 2016. "Foreign divestment decisions: A theoretical framework," Working Papers 6450, Graduate School of Management, St. Petersburg State University.
    4. Giuliano Curatola & Michael Donadelli & Patrick Gruning & Christoph Meinerding, 2016. "Investment-Specific Shocks, Business Cycles, and Asset Prices," Bank of Lithuania Working Paper Series 36, Bank of Lithuania.
    5. Plogmann, Jana & Mußhoff, Oliver & Odening, Martin & Ritter, Matthias, 2022. "Farmland sales under returns and price uncertainty," Economic Modelling, Elsevier, vol. 117(C).
    6. Tobias Dalhaus & Barry J Barnett & Robert Finger, 2020. "Behavioral weather insurance: Applying cumulative prospect theory to agricultural insurance design under narrow framing," PLOS ONE, Public Library of Science, vol. 15(5), pages 1-25, May.
    7. Christian D. Schade & Avichai Snir, 2020. "A lab test on the decision not to decide," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1253-1291, November.
    8. Roman Neyter & Oleg Nivievskyi, 2023. "Effect of subsidies on farms' exit decision," Agribusiness, John Wiley & Sons, Ltd., vol. 39(4), pages 941-959, October.
    9. Barbara Glensk & Christiane Rosen & Reinhard Madlener, 2016. "A Real Options Model for the Disinvestment in Conventional Power Plants," Operations Research Proceedings, in: Marco Lübbecke & Arie Koster & Peter Letmathe & Reinhard Madlener & Britta Peis & Grit Walther (ed.), Operations Research Proceedings 2014, edition 1, pages 173-179, Springer.
    10. Méndez-Suárez, Mariano & Crespo-Tejero, Natividad, 2021. "Why do banks retain unprofitable customers? A customer lifetime value real options approach," Journal of Business Research, Elsevier, vol. 122(C), pages 621-626.
    11. John D Hey & Konstantina Mari, 2015. "Do People Disinvest Optimally?," Discussion Papers 15/13, Department of Economics, University of York.
    12. Wilson, P. & Glithero, N.J. & Ramsden, S.J., 2014. "Prospects for dedicated energy crop production and attitudes towards agricultural straw use: The case of livestock farmers," Energy Policy, Elsevier, vol. 74(C), pages 101-110.
    13. Howley, Peter, 2015. "The Happy Farmer: The Effect Of Non-Pecuniary Benefits On Farmers’ Behavior," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204289, Agricultural Economics Society.

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