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Optimal Farm Size under an Uncertain Land Market: the Case of Kyrgyz Republic

  • Scandizzo, Pasquale Lucio
  • Savastano, Sara

The paper illustrates a theoretical model of real option value applied to the problem of land development. Making use of the 1998-2001 Kyrgyz Household Budget Survey, we show that when the hypothesis of decreasing return to scale holds, the relation between the threshold value of revenue per hectare and the amount of land cultivated is positive. In addition to that, the relation between the threshold and the amount of land owned is positive in the case of continuous supply of land and negative when there is discontinuous supply of land. The direct consequence is that, in the first case, smaller farms will be more willing to rent land and exercise the option where, in the second case, larger farms will exercise first. The results corroborate the findings of the theoretical model and suggest three main conclusions: (i) the combination of uncertainty and irreversibility is a significant factor in the land development decisions, (ii) farmers’ behaviour is consistent with the continuous profit maximization model, (iii) farming unit revenue tends to be positively related to farm size, once uncertainty is properly accounted for.

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File URL: http://purl.umn.edu/52844
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Paper provided by European Association of Agricultural Economists in its series 111th Seminar, June 26-27, 2009, Canterbury, UK with number 52844.

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Date of creation: 20 Aug 2009
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Handle: RePEc:ags:eaa111:52844
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  1. Deininger, Klaus & Feder, Gershon, 1998. "Land institutions and land markets," Policy Research Working Paper Series 2014, The World Bank.
  2. Edward B. Barbier & Joanne C. Burgess, 1997. "The Economics of Tropical Forest Land Use Options," Land Economics, University of Wisconsin Press, vol. 73(2), pages 174-195.
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  8. Binswanger, Hans P. & Deininger, Klaus & Feder, Gershon, 1995. "Power, distortions, revolt and reform in agricultural land relations," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 42, pages 2659-2772 Elsevier.
  9. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
  10. Newell, Andrew & Pandya, Kiran & Symons, James, 1997. "Farm Size and the Intensity of Land Use in Gujarat," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 307-15, April.
  11. Binswanger, Hans P. & Elgin, Miranda, 1988. "What are the Prospects for Land Reform?," 1988 Conference, August 24-31, 1988, Buenos Aires, Argentina 183168, International Association of Agricultural Economists.
  12. Feder, Gershon, 1985. "The relation between farm size and farm productivity : The role of family labor, supervision and credit constraints," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 297-313, August.
  13. Verma, B N & Bromley, Daniel W, 1987. "The Political Economy of Farm Size in India: The Elusive Quest," Economic Development and Cultural Change, University of Chicago Press, vol. 35(4), pages 791-808, July.
  14. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
  15. Vranken, Liesbet & Swinnen, Johan, 2006. "Land rental markets in transition: Theory and evidence from Hungary," World Development, Elsevier, vol. 34(3), pages 481-500, March.
  16. Cornia, Giovanni Andrea, 1985. "Farm size, land yields and the agricultural production function: An analysis for fifteen developing countries," World Development, Elsevier, vol. 13(4), pages 513-534, April.
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