What Factors Affect the Decision to Invest in a Fuel Ethanol Plant?: A Structural Model of the Ethanol Investment Timing Game.

The decision to invest in building an ethanol plant that uses a particular feedstock is a dynamic decision that may be affected by economic factors and government policies. Owing to competition effects and agglomeration effects, a potential investor’s investment decision may also depend on the investment decisions of other investors. This paper analyzes how economic factors, strategic factors, and government policies affect the decision to invest in building new ethanol plants in Europe. We distinguish among investments in ethanol plants of different feedstocks. Our empirical methodology is to estimate a structural econometric model of the dynamic ethanol investment timing game. According to our results, competition between plants deters local investments and has a large negative effect on the payoffs from investment. We also find that government policies have a large positive effect on payoffs from investment. Ethanol investment decisions in Europe are affected more by government policies and strategic interactions than by economic factors.