Optimal Investment Under Uncertainty Regarding Income Subsidies

This paper studies optimal investment decision under uncertainty regarding agricultural income subsidies. The approach is based on stochastic programming. Investment decision is modelled as a Markov decision process. The cost of imperfect information can be estimated as the difference between the profitability of investment under stable income subsidies and under uncertain subsidies. risk. Assuming random income is stationary or non-increasing over time, there is little scope for an option value of postponing investment. A source of an option value assuming non-increasing non-stationary random income comes from the explicit modelling of a cost associated with risk (variance). Examples suggest that the optimal timing of the investment is sensitive to the modelling of risk.