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Optimal Farm Size under an Uncertain Land Market: the Case of Kyrgyz Republic

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  • Scandizzo, Pasquale Lucio
  • Savastano, Sara

Abstract

The paper illustrates a theoretical model of real option value applied to the problem of land development. Making use of the 1998-2001 Kyrgyz Household Budget Survey, we show that when the hypothesis of decreasing return to scale holds, the relation between the threshold value of revenue per hectare and the amount of land cultivated is positive. In addition to that, the relation between the threshold and the amount of land owned is positive in the case of continuous supply of land and negative when there is discontinuous supply of land. The direct consequence is that, in the first case, smaller farms will be more willing to rent land and exercise the option where, in the second case, larger farms will exercise first. The results corroborate the findings of the theoretical model and suggest three main conclusions: (i) the combination of uncertainty and irreversibility is a significant factor in the land development decisions, (ii) farmers’ behaviour is consistent with the continuous profit maximization model, (iii) farming unit revenue tends to be positively related to farm size, once uncertainty is properly accounted for.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 111th Seminar, June 26-27, 2009, Canterbury, UK with number 52844.

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Date of creation: 20 Aug 2009
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Handle: RePEc:ags:eaa111:52844

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Keywords: Option value theory; Farm size; Uncertainty; irreversibility; Agricultural and Food Policy; Land Economics/Use; Resource /Energy Economics and Policy; O13; Q12; Q15; Q18;

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  1. Binswanger, Hans P. & Deininger, Klaus & Feder, Gershon, 1993. "Power, distortions, revolt, and reform in agricultural land relations," Policy Research Working Paper Series 1164, The World Bank.
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  5. Carter, Michael R, 1984. "Identification of the Inverse Relationship between Farm Size and Productivity: An Empirical Analysis of Peasant Agricultural Production," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 131-45, March.
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  7. Deininger, Klaus & Feder, Gershon, 1998. "Land institutions and land markets," Policy Research Working Paper Series 2014, The World Bank.
  8. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
  9. Feder, Gershon, 1985. "The relation between farm size and farm productivity : The role of family labor, supervision and credit constraints," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 297-313, August.
  10. Benjamin, Dwayne, 1995. "Can unobserved land quality explain the inverse productivity relationship?," Journal of Development Economics, Elsevier, vol. 46(1), pages 51-84, February.
  11. Verma, B N & Bromley, Daniel W, 1987. "The Political Economy of Farm Size in India: The Elusive Quest," Economic Development and Cultural Change, University of Chicago Press, vol. 35(4), pages 791-808, July.
  12. Newell, Andrew & Pandya, Kiran & Symons, James, 1997. "Farm Size and the Intensity of Land Use in Gujarat," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 307-15, April.
  13. Louis Putterman & Xiao-Yuan Dong, 1997. "Pre-Reform Industry and The State Monopsony in China," William Davidson Institute Working Papers Series 94, William Davidson Institute at the University of Michigan.
  14. Feder, Gershon & Lau, Lawrence J. & Lin, Justin & Luo Xiaopeng, 1990. "The determinants of farm investment and residential construction in post-reform China," Policy Research Working Paper Series 471, The World Bank.
  15. Edward B. Barbier & Joanne C. Burgess, 1997. "The Economics of Tropical Forest Land Use Options," Land Economics, University of Wisconsin Press, vol. 73(2), pages 174-195.
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Cited by:
  1. Tubetov, Dulat & Maart, Syster Christin & Musshoff, Oliver, 2012. "Comparison of the Investment Behavior of German and Kazakhstani Farmers: an Experimental Approach," Discussion Papers 122422, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
  2. Tubetov, Dulat & Maart, Syster Christin & Musshoff, Oliver, 2012. "Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124650, Agricultural and Applied Economics Association.
  3. Tubetov, Dulat & Musshoff, Oliver & Kellner, Ulla, 0. "Investments in Kazakhstani Dairy Farming: A Comparison of Classical Investment Theory and the Real Options Approach," Quarterly Journal of International Agriculture, Humboldt-Universität zu Berlin, vol. 51.
  4. Tilman Brück & Damir Esenaliev & Antje Kroeger & Alma Kudebayeva & Bakhrom Mirkasimov & Susan Steiner, 2012. "Household Survey Data for Research on Well-Being and Behavior in Central Asia," Discussion Papers of DIW Berlin 1257, DIW Berlin, German Institute for Economic Research.
  5. Ihli, Hanna Julia & Musshoff, Oliver, 2013. "Understanding the Investment Behavior of Ugandan Smallholder Farmers: An Experimental Analysis," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150331, Agricultural and Applied Economics Association.

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