FEEM working papers "Note di lavoro" series
2002 .072

Input Use and Capacity Constraint under Uncertainty: The Case of Irrigation.


Authors: Pascal Favard, Philippe Bontems
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Book
Keywords: Irrigation,Investment,Uncertainty and risk aversion
JEL n.: D8,Q15
JEL: Focus on Agricultural Economics
Pages: pp. 267-287, ISBN: 1 59454 245 7
Published in: Nova Science Publishers, Inc.

Abstract

In this paper we consider a two periods model of cropping using irrigation. The farmer takes two kind of decisions, one related to the level of investment in irrigation capacity and the other one to the irrigation level in each period. In the first period, decisions are taken under uncertainty on the rainfall level which is resolved at the beginning of the second period. Assuming a CARA utility function, we show that taxing the investment may entail an increase in preventive irrigation although the investment decreases. Moreover, in the case of a logistic production function, the total water use is non monotonic with respect to the price of investment. Indeed, taxing capital may induce the farmer to increase the total level of irrigation despite that the irrigation capacity decreases. Surprisingly, the impact of an increase of water price is generally ambiguous even assuming risk neutrality.
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