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Biodiesel as a Substitute for Petroleum Diesel in a Stochastic Environment

Published online by Cambridge University Press:  28 April 2015

Irfan Y. Tareen ,
Michael E. Wetzstein  and
James A. Duffield
Irfan Y. Tareen
Affiliation:
Department of Agricultural and Applied Economics, The University of Georgia
Michael E. Wetzstein
Affiliation:
Department of Agricultural and Applied Economics, The University of Georgia
James A. Duffield
Affiliation:
Office of Energy and New Uses, USDA
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Abstract

The objective of the research presented in this paper is the development of a stochastic adoption threshold. The option pricing approach for modeling investment under uncertainty is extended for the case of comparing two stochastic input prices associated with inputs that are perfect substitutes in a production process. Based on this methodology, a threshold decision rule influenced by the drift and volatility of these two input prices is developed. Theoretical results establish an empirical link for measuring the tradeoff of a relatively more expensive input (biodiesel) with lower price drift and volatility compared with a lower but more volatile priced input (petroleum diesel).

Keywords

Option pricingproductionrenewable fuelstechnology adoption under uncertainty
Type
Invited Paper Sessions
Information
Journal of Agricultural and Applied Economics , Volume 32 , Issue 2 , August 2000 , pp. 373 - 381
Copyright
Copyright © Southern Agricultural Economics Association 2000

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