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Endogenizing the Reservation Value in Models of Land Development Over Time and Under Uncertainty

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  • Amitrajeet Batabyal
  • Basudeb Biswas

Abstract

The notion of a reservation value is a key feature of most contemporary dynamic and stochastic models of land development. It is clear that the magnitude of the reservation value has a fundamental bearing on the decision to develop or preserve land. This notwithstanding, many papers that analyze land development in a dynamic and stochastic setting treat a landowner’s reservation value as an exogenous variable. Therefore, the purpose of this paper is to endogenize the reservation value in the context of a model of land development over time and under uncertainty. Our analysis shows that the optimal reservation value is the solution to a specific maximization problem. In addition, we also show that there exist theoretical circumstances in which the optimal reservation value is unique.

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File URL: ftp://repec.bus.usu.edu/RePEc/usu/pdf/ERI2004-18.pdf
File Function: First version, 2004
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Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2004-18.

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Date of creation: Nov 2004
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Handle: RePEc:usu:wpaper:2004-18

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Keywords: dynamics; endogenous reservation value; land development; uncertainty;

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  1. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
  2. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  3. Tavernier, Edmund M. & Li, Farong & Temel, Tugrul T., 1996. "Search Theory Risk Preference And Farmland Preservation," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 25(1), April.
  4. Tavernier, Edmund M. & Li, Farong, 1995. "Effectiveness Of Use-Value Assessment In Preserving Farmland: A Search-Theoretic Approach," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 27(02), December.
  5. Richard Arnott & Frank D. Lewis, 1977. "The Transition of Land to Urban Use," Working Papers 267, Queen's University, Department of Economics.
  6. R. Glenn Hubbard, 1994. "Investment under Uncertainty: Keeping One's Options Open," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1816-1831, December.
  7. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  9. Markusen, James R. & Scheffman, David T., 1978. "The timing of residential land development: A general equilibrium approach," Journal of Urban Economics, Elsevier, vol. 5(4), pages 411-424, October.
  10. Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
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