A number of new crops have been developed that address important traits of particular relevance for smallholder farmers in Africa. Scientists, policy makers, and other stakeholders have raised concerns that the approval process for these new crops causes delays that are often scientifically unjustified.
This article develops a real option model for the optimal regulation of a risky technology that enhances economic welfare and reduces malnutrition. We consider gradual adoption of the technology and show that delaying approval reduces uncertainty about perceived risks of the technology. Optimal conditions for approval incorporate parameters of the stochastic processes governing the dynamics of risk. The model is applied to three cases of improved crops, which either are, or are expected to be, delayed by the regulatory process.
The benefits and costs of the crops are presented in a partial equilibrium that considers changes in adoption over time and the foregone benefits caused by a delay in approval under irreversibility and uncertainty. We derive the equilibrium conditions where the net-benefits of the technology equal the costs that would justify a delay.
The sooner information about the safety of the technology arrive, the lower the costs for justifying a delay need to be i.e. it pays more to delay. The costs of a delay can be substantial: e.g. a one year delay in approval of the pod-borer resistant cowpea in Nigeria will cost the country about 33 million USD to 46 million USD and between 100 and 3,000 lives.