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Real option valuation of abandoned farmland

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  • Michi Nishihara

Abstract

This paper investigates the decision‐making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I make a real option valuation of the abandoned farmland taking prospective land conversion into consideration. Results from the model calibration demonstrate that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. Further, the results show that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.

Suggested Citation

  • Michi Nishihara, 2012. "Real option valuation of abandoned farmland," Review of Financial Economics, John Wiley & Sons, vol. 21(4), pages 188-192, November.
    • Handle: RePEc:wly:revfec:v:21:y:2012:i:4:p:188-192
    DOI: 10.1016/j.rfe.2012.07.002
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