A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water

Abstract This article develops a stochastic dynamic model of irrigation technology adoption. It predicts that farms will not invest in modern technologies unless the expected present value of investment exceeds the cost by a potentially large hurdle rate. The article also demonstrates that, contrary to common belief, water markets can delay adoption. The introduction of a market should induce farms with abundant (scarce) water supplies to adopt earlier (later) than they would otherwise. This article was motivated by evidence that, contrary to NPV predictions, farms wait until random events such as drought drive returns significantly above costs before investing in modern irrigation technologies.