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Wetlands Mitigation Banks: A Developer's Investment Problem

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  • Fernandez, Linda M
  • Karp, Larry

Abstract

We study a land developer's decision to invest in a wetlands mitigation bank. The state at which it is optimal to "cash in" the investment in return for restoration credits increases with uncertainty. We calibrate and numerically solve a stochastic control model which describes the developer's investment problem. We study the effect of the parameters of the model on the investment trajectory and the optimal stopping state. A subsidy increases the option value of the investment and the stopping state. A small decrease in the variance of the state dynamics decreases the option value of investment and the stopping state.

Suggested Citation

  • Fernandez, Linda M & Karp, Larry, 1995. "Wetlands Mitigation Banks: A Developer's Investment Problem," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2255j5sj, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt2255j5sj
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