Hostname: page-component-586b7cd67f-t8hqh Total loading time: 0 Render date: 2024-11-26T03:22:23.908Z Has data issue: false hasContentIssue false

Economic Hysteresis in Variety Selection

Published online by Cambridge University Press:  28 April 2015

Timothy J. Richards
Affiliation:
Agribusiness, Morrison School of Agribusiness and Resource Management, Arizona State University, Mesa, AZ
Gareth P. Green
Affiliation:
Department of Economics and Finance, Seattle University, Seattle, WA

Abstract

Investing in a new perennial crop variety involves an irreversible commitment of capital and generates an uncertain return stream. As a result, the decision to adopt a new variety includes a significant real option value. Waiting for returns to rise above this real option causes a delay in adoption because of economic hysteresis. This study tests for hysteresis in the adoption of wine grape varieties using a sample of district-level data from the state of California. The empirical results show a significant hysteretic effect in wine grape investment, which might be reduced by activities that smooth earnings over time.

Type
Articles
Copyright
Copyright © Southern Agricultural Economics Association 2003

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A.B., and Eberly, J.C.. “A Unified Model of Investment Under Uncertainty.” American Economic Review 84(December 1994):1369–84.Google Scholar
Azzam, A.Asymmetry and Rigidity in Farm-Retail Price Transmission.” American Journal of Agricultural Economics 81(August 1999):525–33.CrossRefGoogle Scholar
Ball, C.A., and Torous, W.N.. “A Simplified Jump Process for Common Stock Returns.” Journal of Financial and Quantitative Analysis 19(March 1983):5365.CrossRefGoogle Scholar
Ball, C.A., and Torous, W.N.. “On Jumps in Common Stock Prices and Their Impact on Call Option Pricing.” The Journal of Finance 40(March 1985):155–73.CrossRefGoogle Scholar
Bates, D.S.Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options.” Review of Financial Studies 9(Spring 1996):69107.CrossRefGoogle Scholar
California Department of Food and Agriculture (CDFA). California Grape Acreage. Sacramento, CA: California Crop and Livestock Reporting Service, various issues.Google Scholar
California Department of Food and Agriculture (CDFA). Grape Crush Report. Sacramento, CA: California Agricultural Statistics Service, various issues.Google Scholar
Dixit, A.K.Entry and Exit Decisions Under Uncertainty.” Journal of Political Economy 97(June 1989):620–38.CrossRefGoogle Scholar
Dixit, A.K.Investment and Hysteresis.” Journal of Economic Perspectives 6(Winter 1992):107–32.CrossRefGoogle Scholar
Dixit, A.K., and Pindyck, R.S.. Investment Under Uncertainty. Princeton, NJ: Princeton University Press, 1994.CrossRefGoogle Scholar
Goodhue, R., Heien, D., and Lee, H.. “Contract Use in the California Winegrape Economy.” Davis, CA: University of California Davis, Agricultural Issues Center, AIC Issues Brief 11, December 1999.Google Scholar
Hilliard, J.E., and Reis, J.A.. “Jump Processes in Commodity Futures Prices and Options Pricing.” American Journal of Agricultural Economics 81 (May 1999):273–86.CrossRefGoogle Scholar
Houck, J.P.An Approach to Specifying and Estimating Nonreversible Functions.” American Journal of Agricultural Economics 59(August 1977):570–72.CrossRefGoogle Scholar
Jarrow, R.A., and Rosenfeld, E.R.. “Jump Risks in the Intertemporal Capital Asset Pricing Model.” Journal of Business 57(1984):337–51.CrossRefGoogle Scholar
Merton, R.C.Option Pricing When Underlying Stock Returns Are Discontinuous.” Journal of Financial Economics 3(1976):125–44.CrossRefGoogle Scholar
Naik, V., and Lee, M.. “General Equilibrium Pricing of Options on the Market Portfolio with Discontinuous Returns.” Review of Financial Studies 39(Winter 1990):493521.CrossRefGoogle Scholar
Oude, Lansink A., and Stefanou, S.E.. “Asymmetric Adjustment of Dynamic Factors at the Firm Level.” American Journal of Agricultural Economics 79(November 1997):1340–51.Google Scholar
Parsley, D.C., and Wei, S.-J.. “Insignificant and Inconsequential Hysteresis: The Case of U.S. Bilateral Trade.” Review of Economics and Statistics 75(November 1993):606–13.CrossRefGoogle Scholar
Price, T.J., and Wetzstein, M.E.. “Irreversible Investment in Perennial Crops with Yield and Price Uncertainty.” Journal of Agricultural and Resource Economics 24(July 1999):173–85.Google Scholar
Purvis, A., Boggess, W.G., Moss, C.B., and Holt, J.. “Technology Adoption Decisions Under Irreversibility and Uncertainty: An Ex Ante Approach.” American Journal of Agricultural Economics 77(1995):541–51.CrossRefGoogle Scholar
Richards, T.J.Economic Hysteresis and the Effects of Output Regulation.” Journal of Agricultural and Resource Economics 21(July 1996):117.Google Scholar
Richards, T.J., and Patterson, P.M.. “Hysteresis and the Shortage of Agricultural Labor.” American Journal of Agricultural Economics 80(1998):683–95.CrossRefGoogle Scholar
Rosett, R.N.A Statistical Model of Friction in Economics.” Econometrica 27(1959):263–67.CrossRefGoogle Scholar
Stiegert, K.W., and Hertel, T.W.. “Optimal Capacity in the Anhydrous Ammonia Industry.” American Journal of Agricultural Economics 79(1997):1096–107.CrossRefGoogle Scholar
Vande Kamp, P.R., and Kaiser, H.M.. “Irreversibility in Advertising-Demand Response Functions: An Application to Milk.” American Journal of Agricultural Economics 81(1999):385–96.CrossRefGoogle Scholar
Varian, H.Microeconomic Analysis. New York: Norton, 1984.Google Scholar
Wolffram, R.Positivistic Measures of Aggregate Supply Elasticities: Some New Approaches—Some Critical Notes.” American Journal of Agricultural Economics 53(May 1971):356–59.CrossRefGoogle Scholar