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Endogenizing the Reservation Value in Models of Land Development Over Time and Under Uncertainty

Author

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  • Amitrajeet Batabyal
  • Basudeb Biswas

Abstract

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.

Suggested Citation

  • Amitrajeet Batabyal & Basudeb Biswas, 2004. "Endogenizing the Reservation Value in Models of Land Development Over Time and Under Uncertainty," Working Papers 2004-18, Utah State University, Department of Economics.
    • Handle: RePEc:usu:wpaper:2004-18
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    File URL: https://repec.bus.usu.edu/RePEc/usu/pdf/ERI2004-18.pdf
    File Function: First version, 2004
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    JEL classification:

    • R19 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Other
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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