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Real option valuation of abandoned farmland

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  • Nishihara, Michi

Abstract

This paper investigates the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I make a real option valuation of the abandoned farmland taking prospective land conversion into consideration. Results from the model calibration demonstrate that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. Further, the results show that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.

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  • Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
    • Handle: RePEc:eee:revfin:v:21:y:2012:i:4:p:188-192
    DOI: 10.1016/j.rfe.2012.07.002
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Real option; Abandoned farmland; Land development; Land conversion;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns

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