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Real option valuation of abandoned farmland


  • Nishihara, Michi


This paper investigates the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I make a real option valuation of the abandoned farmland taking prospective land conversion into consideration. Results from the model calibration demonstrate that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. Further, the results show that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.

Suggested Citation

  • Nishihara, Michi, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, Elsevier, vol. 21(4), pages 188-192.
  • Handle: RePEc:eee:revfin:v:21:y:2012:i:4:p:188-192 DOI: 10.1016/j.rfe.2012.07.002

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    References listed on IDEAS

    1. 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.
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    5. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
    6. Geoffrey Turnbull, 2005. "The Investment Incentive Effects of Land Use Regulations," The Journal of Real Estate Finance and Economics, Springer, vol. 31(4), pages 357-395, December.
    7. Robert Grovenstein & James Kau & Henry Munneke, 2011. "Development Value: A Real Options Approach Using Empirical Data," The Journal of Real Estate Finance and Economics, Springer, vol. 43(3), pages 321-335, October.
    8. Martzoukos, Spiros H. & Trigeorgis, Lenos, 2002. "Real (investment) options with multiple sources of rare events," European Journal of Operational Research, Elsevier, vol. 136(3), pages 696-706, February.
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    10. M Nishihara, 2012. "Real options with synergies: static versus dynamic policies," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 63(1), pages 107-121, January.
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    12. Plantinga, Andrew J. & Lubowski, Ruben N. & Stavins, Robert N., 2002. "The effects of potential land development on agricultural land prices," Journal of Urban Economics, Elsevier, vol. 52(3), pages 561-581, November.
    13. Michi Nishihara & Takashi Shibata, 2010. "Interactions between Preemptive Competition and a Financing Constraint," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 1013-1042, December.
    14. Riddiough, Timothy J., 1997. "The Economic Consequences of Regulatory Taking Risk on Land Value and Development Activity," Journal of Urban Economics, Elsevier, vol. 41(1), pages 56-77, January.
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    16. Nancy Bockstael, 2008. "An Empirical Examination of the Timing of Land Conversions in the Presence of Farmland Preservation Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 613-626.
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    Cited by:

    1. Di Corato, Luca, 2016. "Rural land development under hyperbolic discounting: a real option approach," Working Paper Series 2016:8, Swedish University of Agricultural Sciences, Department Economics.

    More about this item


    Real option; Abandoned farmland; Land development; Land conversion;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns


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