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A Dynamic Stochastic Programming Framework for Modeling Large Scale Land Deals in Developing Countries

  • Corato, Luca Di
  • Hess, Sebastian

The attractiveness of agricultural land available in developing countries has markedly increased in the last few years. Driven by rising and highly volatile prices for agricul- tural commodities, large land acquisitions have been undertaken by foreign investors. We formalize the discussion surrounding such large scale land deals through a dynamic stochastic programming model. Within this framework, we first determine the value of a land development project under uncertainty about prices for agricultural commodi- ties, political risk and irreversible capital investment. Second, given an exogenously set corporate tax rate, we determine, in both a cooperative and a non-cooperative set- ting, the optimal land rental payment. We show that 1) the optimal policy scheme is equivalent to a risk-sharing contract, 2) trading o¤ rental payment with tax revenue is detrimental for both total project value and domestic benefits and 3) taxation has a neutral impact on long-run the land development pace. We complete our study by illustrating our results through an empirical application based on observed individual land deals from Ethiopia and simulations for a specific crop in a selected region that has recently been targeted by foreign investments.

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Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 150190.

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Date of creation: 01 Jun 2013
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Handle: RePEc:ags:aaea13:150190
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  1. Pennings, Enrico, 2005. "How to maximize domestic benefits from foreign investments: the effect of irreversibility and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 873-889, May.
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  7. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
  8. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
  9. Chakravorty, Ujjayant & Hubert, Marie-Helene & Nostbakken, Linda, 2009. "Fuel versus Food," Working Papers 2009-20, University of Alberta, Department of Economics.
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  11. Song, Feng & Zhao, Jinhua & Swinton, Scott M., 2009. "Switching to Perennial Energy Crops under Uncertainty and Costly Reversibility," Staff Papers 56195, Michigan State University, Department of Agricultural, Food, and Resource Economics.
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