An Empirical Examination of Real Options and the Timing of Land Conversions

Many studies have examined the effects of land use regulations on land prices and urban spatial form. Increasingly, jurisdictions have adopted incentive based mechanisms, such as purchase of development rights (PDR) programs, to manage the pace and pattern of urban growth and the conversion of agricultural land. PDR programs provide a third option to landowners in urbanizing areas: in addition to deciding whether to develop or not, landowners can decide whether to preserve their land. To our knowledge no studies have explored how the existence of an option to participate in a PDR program affects landowners' development decisions. This research provides empirical evidence of a previously untested prediction of real options theory: that additional options increase the value of waiting to make irreversible decisions. Our paper considers how an additional land use alternative, preservation, conveys a different type of option value and how that option affects the optimal conversion time. We estimate a hazard model and find significant evidence that the option to enter an easement decreases the hazard rate of development by about 40%. The results suggest that PDR programs can provide additional open space and amenity values beyond what is provided on preserved parcels, by delaying development (by at least a few years) of parcels that are not actually preserved.

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Working or Discussion Paper
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Selected Paper 136619

 Record created 2017-04-01, last modified 2018-01-22

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