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Department Economics, Swedish University of Agricultural Sciences Working Paper Series, Department Economics, Swedish University of Agricultural Sciences

No 2016:4:
Passive farming and land development: a real option approach

Luca Di Corato () and Mark Brady ()

Abstract: 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.

Keywords: Real Options; Land development; Passive Farming; Nash Bargaining; (follow links to similar papers)

JEL-Codes: C61; Q15; R14; (follow links to similar papers)

32 pages, April 15, 2016

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