Scandinavian Working Papers in Economics

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

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

Luca Di Corato () and Mark Brady ()
Additional contact information
Luca Di Corato: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden
Mark Brady: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

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

JEL-codes: C61; Q15; R14

32 pages, April 15, 2016

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