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| Heikkinen, Tiina; Pietola, Kyosti. |
| This paper studies optimal investment and the dynamic cost of income uncertainty, applying a stochastic programming approach. The motivation is given by a case study in Finnish agriculture. Investment decision is modelled as a Markov decision process, extended to account for risk. A numerical framework for studying the dynamic uncertainty cost is presented, modifying the classical expected value of perfect information to a dynamic setting. The uncertainty cost depends on the volatility of income; e.g. with stationary income, the dynamic uncertainty cost corresponds to a dynamic option value of postponing investment. The numerical investment model also yields the optimal investment behavior of a representative farm. The model can be applied e.g. in planning... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Financial Economics. |
| Ano: 2006 |
URL: http://purl.umn.edu/11868 |
