IDEAS home Printed from https://ideas.repec.org/p/ags/aaea05/19125.html
   My bibliography  Save this paper

An Empirical Examination of Real Options and the Timing of Land Conversions

Author

Listed:
  • Towe, Charles A.
  • Nickerson, Cynthia J.
  • Bockstael, Nancy E.

Abstract

Many studies have examined the effects of land use regulations on land prices and urban spatial form. Increasingly, jurisdictions have adopted incentive based mechanisms, such as purchase of development rights (PDR) programs, to manage the pace and pattern of urban growth and the conversion of agricultural land. PDR programs provide a third option to landowners in urbanizing areas: in addition to deciding whether to develop or not, landowners can decide whether to preserve their land. To our knowledge no studies have explored how the existence of an option to participate in a PDR program affects landowners' development decisions. This research provides empirical evidence of a previously untested prediction of real options theory: that additional options increase the value of waiting to make irreversible decisions. Our paper considers how an additional land use alternative, preservation, conveys a different type of option value and how that option affects the optimal conversion time. We estimate a hazard model and find significant evidence that the option to enter an easement decreases the hazard rate of development by about 40%. The results suggest that PDR programs can provide additional open space and amenity values beyond what is provided on preserved parcels, by delaying development (by at least a few years) of parcels that are not actually preserved.

Suggested Citation

  • Towe, Charles A. & Nickerson, Cynthia J. & Bockstael, Nancy E., 2005. "An Empirical Examination of Real Options and the Timing of Land Conversions," 2005 Annual meeting, July 24-27, Providence, RI 19125, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19125
    DOI: 10.22004/ag.econ.19125
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/19125/files/sp05to01.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.19125?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nancy E. Bockstael, 1996. "Modeling Economics and Ecology: The Importance of a Spatial Perspective," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(5), pages 1168-1180.
    2. Daniel P. McMillen, 1989. "An Empirical Model of Urban Fringe Land Use," Land Economics, University of Wisconsin Press, vol. 65(2), pages 138-145.
    3. Geltner, David & Riddiough, Timothy & Stojanovic, Srdjan, 1996. "Insights on the Effect of Land Use Choice: The Perpetual Option on the Best of Two Underlying Assets," Journal of Urban Economics, Elsevier, vol. 39(1), pages 20-50, January.
    4. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
    5. Abebayehu Tegene & Keith Wiebe & Betsey Kuhn, 1999. "Irreversible Investment Under Uncertainty: Conservation Easements and the Option to Develop Agricultural Land," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 203-219, May.
    6. Elena G. Irwin, 2002. "The Effects of Open Space on Residential Property Values," Land Economics, University of Wisconsin Press, vol. 78(4), pages 465-480.
    7. Lori Lynch & Wesley N. Musser, 2001. "A Relative Efficiency Analysis of Farmland Preservation Programs," Land Economics, University of Wisconsin Press, vol. 77(4), pages 577-594.
    8. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 1-20, March.
    9. Duke, Joshua M., 2004. "Participation in Agricultural Land Preservation Programs: Parcel Quality and a Complex Policy Environment," Agricultural and Resource Economics Review, Cambridge University Press, vol. 33(1), pages 34-49, April.
    10. Elena G. Irwin & Nancy E. Bockstael, 2001. "The Problem of Identifying Land Use Spillovers: Measuring the Effects of Open Space on Residential Property Values," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 698-704.
    11. Hite, Diane & Sohngen, Brent & Templeton, Josh, 2003. "Zoning, Development Timing, and Agricultural Land Use at the Suburban Fringe: A Competing Risks Approach," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(1), pages 153-153, April.
    12. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
    13. Bucholtz, Shawn & Geoghegan, Jacqueline & Lynch, Lori, 2003. "Capitalization of Open Spaces into Housing Values and the Residential Property Tax Revenue Impacts of Agricultural Easement Programs," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(1), pages 1-13, April.
    14. Miller, Douglas J. & Nickerson, Cynthia J., 2003. "Impact Of Farmland Preservation Programs On The Rate Of Urban Development," 2003 Annual meeting, July 27-30, Montreal, Canada 22170, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    15. Lynch, Lori & Carpenter, Janet, 2003. "Is There Evidence of a Critical Mass in the Mid-Atlantic Agriculture Sector Between 1949 and 1997?," Agricultural and Resource Economics Review, Cambridge University Press, vol. 32(1), pages 116-128, April.
    16. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    17. Hite, Diane & Sohngen, Brent & Templeton, Josh, 2003. "Zoning, Development Timing, and Agricultural Land Use at the Suburban Fringe: A Competing Risks Approach," Agricultural and Resource Economics Review, Cambridge University Press, vol. 32(1), pages 145-157, April.
    18. Quigg, Laura, 1993. "Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kathleen P. Bell & Timothy J. Dalton, 2007. "Spatial Economic Analysis in Data‐Rich Environments," Journal of Agricultural Economics, Wiley Blackwell, vol. 58(3), pages 487-501, September.
    2. Khalid, Haniza & Lloyd, Timothy Adrian & Morgan, Christopher Wyn, 2013. "The Impact of Economic Transformation and the Credibility of Planning Control on Agricultural Land Values," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 62(2).
    3. Wang, Han & Wu, Xingyi & Wu, Di & Nie, Xin, 2019. "Will land development time restriction reduce land price? The perspective of American call options," Land Use Policy, Elsevier, vol. 83(C), pages 75-83.
    4. Khalid, Haniza & Lloyd, Timothy Adrian & Morgan, Christopher Wyn, 2013. "The Impact of Economic Transformation and the Credibility of Planning Control on Agricultural Land Values," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 62(02), pages 1-12, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Siu, Wai Yan & Akhundjanov, Sherzod B., 2020. "Fracking Boom and Agricultural Doom: Evidence from Kern County, California," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304255, Agricultural and Applied Economics Association.
    2. Luca Di Corato, 2018. "Rural land development under hyperbolic discounting: a real option approach," Letters in Spatial and Resource Sciences, Springer, vol. 11(2), pages 167-182, July.
    3. Kathleen P. Bell & Timothy J. Dalton, 2007. "Spatial Economic Analysis in Data‐Rich Environments," Journal of Agricultural Economics, Wiley Blackwell, vol. 58(3), pages 487-501, September.
    4. Lynch, Lori & Duke, Joshua M., 2007. "Economic Benefits of Farmland Preservation: Evidence from the United States," Working Papers 7342, University of Maryland, Department of Agricultural and Resource Economics.
    5. Jason Winfree & Jill McCluskey & Ron Mittelhammer, 2006. "Buyer-Type Effects in Conservation and Preservation Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 33(2), pages 167-179, September.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. Zipp, Katherine Y. & Lewis, David J. & Provencher, Bill, 2017. "Does the conservation of land reduce development? An econometric-based landscape simulation with land market feedbacks," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 19-37.
    8. Kwabena Mintah, 2018. "Real Options Analysis in Residential Property Development Decision-Making in Australia: Perspective of Executives," International Real Estate Review, Global Social Science Institute, vol. 21(4), pages 473-520.
    9. Kovacs, Kent F., 2009. "The Timing of Rapid Farmland Conversion Events: Evidence from California's Differential Assessment Program," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49252, Agricultural and Applied Economics Association.
    10. Irwin, Elena G. & Bockstael, Nancy E., 2004. "Land use externalities, open space preservation, and urban sprawl," Regional Science and Urban Economics, Elsevier, vol. 34(6), pages 705-725, November.
    11. Huimin Yao & Frederik Pretorius, 2014. "Demand Uncertainty, Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Development," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 829-868, December.
    12. Winfree, Jason A. & McCluskey, Jill J. & Mittelhammer, Ronald C., 2002. "An Option Value Approach To Valuing Preservation Properties," 2002 Annual Meeting, July 28-31, 2002, Long Beach, California 36619, Western Agricultural Economics Association.
    13. Andrianos Tsekrekos & George Kanoutos, 2013. "Real Options Premia Implied from Recent Transactions in the Greek Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 152-168, July.
    14. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    15. Rocha, Katia & Salles, Luciana & Garcia, Francisco Augusto Alcaraz & Sardinha, Jose A. & Teixeira, Jose P., 2007. "Real estate and real options -- A case study," Emerging Markets Review, Elsevier, vol. 8(1), pages 67-79, March.
    16. Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
    17. Waltert, Fabian & Schläpfer, Felix, 2010. "Landscape amenities and local development: A review of migration, regional economic and hedonic pricing studies," Ecological Economics, Elsevier, vol. 70(2), pages 141-152, December.
    18. Michi Nishihara, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, John Wiley & Sons, vol. 21(4), pages 188-192, November.
    19. Lin, Huiyan & Lu, Kang Shou & Espey, Molly & Allen, Jeffery, 2005. "Modeling Urban Sprawl and Land Use Change in a Coastal Area-- A Neural Network Approach," 2005 Annual meeting, July 24-27, Providence, RI 19364, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    20. Carrión-Flores, Carmen E. & Flores-Lagunes, Alfonso & Guci, Ledia, 2018. "An estimator for discrete-choice models with spatial lag dependence using large samples, with an application to land-use conversions," Regional Science and Urban Economics, Elsevier, vol. 69(C), pages 77-93.

    More about this item

    Keywords

    Land Economics/Use;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea05:19125. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.