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A Hedonic Price Analysis of Farmland Option Premiums Under Urban Influences

  • Tamer Isgin
  • D. Lynn Forster
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    "An emerging theory, real option pricing, suggests that an important component of urban fringe farmland values may be the option value arising from nearby urban development. This new option pricing theory, as opposed to its standard conventional counterpart in finance, incorporates both the uncertainty about the future net benefits of a land conversion decision and the irreversibility of this action taken. We demonstrate that parsimonious empirical hedonic models of the errors-in-variables type, when corrected for heteroskedasticity, can provide adequate representations of farmland option premiums. Data for a random sample of cash rented Ohio farmland parcels are used, and the impacts of urban development on farmland option premiums are estimated. Results provide evidence that (a) both land-use conversion probability and urban influences have been important factors affecting the option value of the state's farmland, and (b) these option premiums associated with irreversible and uncertain land development are capitalized into farmland values." Copyright 2006 Canadian Agricultural Economics Society.

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    Article provided by Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie in its journal Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie.

    Volume (Year): 54 (2006)
    Issue (Month): 3 (09)
    Pages: 327-340

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    Handle: RePEc:bla:canjag:v:54:y:2006:i:3:p:327-340
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