ENDOGENIZING THE RESERVATION VALUE IN MODELS OF LAND DEVELOPMENT OVER TIME AND UNDER UNCERTAINTY

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 landownerÂ’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.


Issue Date:
2004
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/28340
Total Pages:
14
Series Statement:
ERI 2004-18




 Record created 2017-04-01, last modified 2017-08-24

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