Endogenizing the Reservation Value in Models of Land Development Over Time and Under Uncertainty
13 Pages Posted: 10 Nov 2004
Date Written: November 2004
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 landowner'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.
Keywords: Dynamics, Endogenous Reservation Value, Land Development, Uncertainty
JEL Classification: R19, Q24, D81
Suggested Citation: Suggested Citation