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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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    References listed on IDEAS

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    1. Carriker, Roy R., 1994. "Wetlands and Environmental Legislation Issues," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 26(1), pages 80-89, July.
    2. William A. Brock & Michael Rothschild & Joseph E. Stiglitz, 1989. "Stochastic Capital Theory," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Joan Robinson and Modern Economic Theory, chapter 20, pages 591-622, Palgrave Macmillan.
    3. Carriker, Roy R., 1994. "Wetlands And Environmental Legislation Issues," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 26(01), pages 1-10, July.
    4. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
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