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Passive farming and land development: a real option approach

Listed author(s):
  • Di Corato, Luca

    ()

    (Department of Economics, Swedish University of Agricultural Sciences)

  • Brady, Mark

    ()

    (Department of Economics, Swedish University of Agricultural Sciences)

We examine the impact that subsidies paid to passive farmers have on the lease of land and on the speed of land development. First, we find that, even if delaying land development, paying passive farmers increases the value of the land. Second, when bargaining for the lease of land, we show that the agreement between the parties is conditional on an underlying development project passing a threshold level in terms of profitability. Third, we identify the conditions leading to a Pareto improvement. Last, we illustrate our findings by considering the establishment of an energy crop on leased land.

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File URL: http://pub.epsilon.slu.se/13269/7/dicorato_et_al_160412.pdf
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Paper provided by Department Economics, Swedish University of Agricultural Sciences in its series Working Paper Series with number 2016:4.

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Length: 32 pages
Date of creation: 15 Apr 2016
Handle: RePEc:hhs:slueko:2016_004
Contact details of provider: Postal:
Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

Phone: 018-67 1724
Fax: 018-67 3502
Web page: http://www.slu.se/ekonomi

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  1. Pavel Ciaian & d’Artis Kancs & Johan Swinnen, 2010. "EU Land Markets and the Common Agricultural Policy," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 53(3), pages 1-31.
  2. Geltner, David & Riddiough, Timothy & Stojanovic, Srdjan, 1996. "Insights on the Effect of Land Use Choice: The Perpetual Option on the Best of Two Underlying Assets," Journal of Urban Economics, Elsevier, vol. 39(1), pages 20-50, January.
  3. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
  4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  5. Renwick, Alan W. & Jansson, Torbjorn & Verburg, Peter H. & Revoredo-Giha, Cesar & Britz, Wolfgang & Gocht, Alexander & McCracken, Davy, 2011. "Policy Reform and Agricultural Land Abandonment," 85th Annual Conference, April 18-20, 2011, Warwick University, Coventry, UK 108772, Agricultural Economics Society.
  6. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
  7. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  8. Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, vol. 109(455), pages 179-189, April.
  9. Jan-Henning Feil & Oliver Musshoff & Alfons Balmann, 2013. "Policy impact analysis in competitive agricultural markets: a real options approach," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 40(4), pages 633-658, September.
  10. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
  11. Brady, Mark V. & Hristov, Jordan & Sahrbacher, Christoph & Willhelmsson, Fredrik, 2015. "Passive farming in Europe: hindering agricultural development or preserving valuable landscape," 147th Seminar, October 7-8, 2015, Sofia, Bulgaria 212248, European Association of Agricultural Economists.
  12. Di Corato, Luca & Gazheli, Ardjan & Lagerkvist, Carl-Johan, 2013. "Investing in energy forestry under uncertainty," Forest Policy and Economics, Elsevier, vol. 34(C), pages 56-64.
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