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Growth Controls, Real Options, and Land Development

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  • Christopher R. Cunningham

    (Federal Reserve Bank of Atlanta)

Abstract

Many urban growth controls attempt to check sprawl by restricting allowable new housing densities. However, land may be undeveloped to preserve its real-option value. Real options in land markets arise from uncertainty as to the optimum use of a site. By limiting allowable development choices, growth controls can narrow real options and potentially accelerate investment. This paper examines the effect of price volatility, a generator of option value, on the timing of development after the imposition of an Urban Growth Boundary (UGB) around Seattle. While the net effect of the UGB is to lower the likelihood of new housing outside the boundary by between 28% and 39%, price volatility is no longer a deterrent to development. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Christopher R. Cunningham, 2007. "Growth Controls, Real Options, and Land Development," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 343-358, May.
  • Handle: RePEc:tpr:restat:v:89:y:2007:i:2:p:343-358
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