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

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Author Info

  • 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.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19125.

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Date of creation: 2005
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Handle: RePEc:ags:aaea05:19125

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Related research

Keywords: agricultural preservation programs; real options; land conversion; Land Economics/Use;

References

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  1. Lynch, Lori & Musser, Wesley N., 1999. "A Relative Efficiency Analysis Of Farmland Preservation Programs," 1999 Annual meeting, August 8-11, Nashville, TN 21639, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. 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.
  3. 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), April.
  4. 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(01), pages 1-20, March.
  5. 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.
  6. 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).
  7. 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, Northeastern Agricultural and Resource Economics Association, vol. 32(1), April.
  8. 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), April.
  9. Duke, Joshua M., 2004. "Participation in Agricultural Land Preservation Programs: Parcel Quality and a Complex Policy Environment," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 33(1), April.
  10. 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.
  11. 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.
  12. 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.
  13. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
  14. Daniel P. McMillen, 1989. "An Empirical Model of Urban Fringe Land Use," Land Economics, University of Wisconsin Press, vol. 65(2), pages 138-145.
  15. 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.
  16. 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.
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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, 09.

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