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The option value of vacant land: Don't build when demand for housing is booming

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  • Lange, Rutger-Jan
  • Teulings, Coen N

Abstract

Urban structures and urban growth rates are highly persistent. This has far-reaching implications for the optimal size and timing of new construction. We prove that rational developers postpone construction not because prospects are gloomy, but because they are bright. For cities that are growing, a positive growth shock causes rational investors not to speed up investment but rather to postpone it. In our model, the observed heterogeneity in floorspace density between cities can be explained not by differences in population levels, but in growth rates.

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  • Lange, Rutger-Jan & Teulings, Coen N, 2021. "The option value of vacant land: Don't build when demand for housing is booming," CEPR Discussion Papers 16023, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16023
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    More about this item

    Keywords

    Irreversible investment; mean-reverting growth; real options; real-estate construction; urban growth;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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