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A Hedonic Price Analysis of Farmland Option Premiums Under Urban Influences

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  • Tamer Isgin
  • D. Lynn Forster

Abstract

"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.

Suggested Citation

  • Tamer Isgin & D. Lynn Forster, 2006. "A Hedonic Price Analysis of Farmland Option Premiums Under Urban Influences," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(3), pages 327-340, September.
  • Handle: RePEc:bla:canjag:v:54:y:2006:i:3:p:327-340
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1744-7976.2006.00053.x
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    References listed on IDEAS

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    1. Turvey, Calum G., 1999. "Real Options And Agricultural Land Values," Proceedings: 1999 Regional Committee NC-221, 1999, Mississauga, Ontario, Canada 132334, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
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    Cited by:

    1. Yemshanov, Denys & McCarney, Geoffrey R. & Hauer, Grant & Luckert, M.K. (Marty) & Unterschultz, Jim & McKenney, Daniel W., 2015. "A real options-net present value approach to assessing land use change: A case study of afforestation in Canada," Forest Policy and Economics, Elsevier, vol. 50(C), pages 327-336.
    2. James R. Wasson & Donald M. McLeod & Christopher T. Bastian & Benjamin S. Rashford, 2013. "The Effects of Environmental Amenities on Agricultural Land Values," Land Economics, University of Wisconsin Press, vol. 89(3), pages 466-478.
    3. Pam Guiling & B. Wade Brorsen & Damona Doye, 2009. "Effect of Urban Proximity on Agricultural Land Values," Land Economics, University of Wisconsin Press, vol. 85(2), pages 252-264.
    4. Jean Cavailhés & Isabelle Thomas, 2011. "The influence of urban sprawl on farmland prices in Belgium (refereed paper)," ERSA conference papers ersa10p1628, European Regional Science Association.
    5. Geerte Cotteleer & Cornelis Gardebroek & Jan Luijt, 2008. "Market Power in a GIS-Based Hedonic Price Model of Local Farmland Markets," Land Economics, University of Wisconsin Press, vol. 84(4), pages 573-592.
    6. Forster, D. Lynn, 2006. "An Overview of U.S. Farm Real Estate Markets," Working Papers 28319, Ohio State University, Department of Agricultural, Environmental and Development Economics.

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