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Endogenizing The Reservation Value In Models Of Land Development Over Time And Under Uncertainty

  • Batabyal, Amitrajeet A.

The notion of a reservation value is a key feature of most contemporary dynamic and stochastic models of land development. It is clear that the magnitude of the reservation value has a fundamental bearing on the decision to develop or preserve land. This notwithstanding, many papers that analyze land development in a dynamic and stochastic setting treat a landowner’s reservation value as an exogenous variable. Therefore, the purpose of this paper is to endogenize the reservation value in the context of a model of land development over time and under uncertainty. Our analysis shows that the optimal reservation value is the solution to a specific maximization problem. In addition, we also show that there exist theoretical circumstances in which the optimal reservation value is unique.

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File URL: http://purl.umn.edu/28340
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Paper provided by Utah State University, Economics Department in its series Economics Research Institute, ERI Series with number 28340.

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Date of creation: 2004
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Handle: RePEc:ags:usuese:28340
Contact details of provider: Web page: http://www.econ.usu.edu/
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  1. Tavernier, Edmund M. & Li, Farong & Temel, Tugrul T., 1996. "Search Theory Risk Preference And Farmland Preservation," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 25(1), April.
  2. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Arnott, Richard J & Lewis, Frank D, 1979. "The Transition of Land to Urban Use," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 161-69, February.
  4. Markusen, James R. & Scheffman, David T., 1978. "The timing of residential land development: A general equilibrium approach," Journal of Urban Economics, Elsevier, vol. 5(4), pages 411-424, October.
  5. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  6. Tavernier, Edmund M. & Li, Farong, 1995. "Effectiveness Of Use-Value Assessment In Preserving Farmland: A Search-Theoretic Approach," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 27(02), December.
  7. R. Glenn Hubbard, 1994. "Investment under Uncertainty: Keeping One's Options Open," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1816-1831, December.
  8. Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
  9. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  10. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
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