The Impact of Information on Land Development: a Dynamic and Stochastic Analysis

Abstract

In a two period model of land development, Arrow and Fisher, and Henry have shown that when development is both indivisible and irreversible, a developer who ignores the possibility of obtaining new information about the outcome of such development will invariably underestimate the benefits of preservation and hence favor development. This paper extends aspects of this literature by (i) studying the development question in a dynamic and stochastic framework, and (ii) explicitly incorporating an information production function into the analysis. In such a setting, I ask and answer the question concerning when development should take place.

Habitat conversion, information acquisition, and the conservation of biodiversity

“…An examination of the social planner's optimization problem when partial stopping is a 20Por more on this literature, see Pindyck (1991), Dixit and Pindyck (1994), and Batabyal (1996Batabyal ( , 1997. The present paper differs from Batabyal (1996) in three ways.…”

Bid Values and their Role in Land Development Over Time and Under Uncertainty

“…Recently, Titman (1985), Capozza and Helsley (1990), and Batabyal (1996Batabyal ( , 1997Batabyal ( , 2000 have studied the subject of land development under uncertainty. In Titman's (1985) model, he first assumes that the value of vacant land in the first period exceeds the wealth of a landowner who wishes to construct a building.…”

“…Analogously, in the continuous-time analysis of Batabyal (1997) , the infinitesimal look ahead stopping rule (ILASR) is utilized to determine when a stochastic "revenue from development" process should be terminated. The paper that is closest to our paper is Batabyal (2000).…”

On some aspects of land development when the decision to develop is divisible

“…Recently, this kind of analysis has been extended by Batabyal (1995Batabyal ( , 1996a, Capozza and Helsley (1990), and Clarke and Reed (1990) to study the development question in a multiperiod framework. However, very little is known about the nature of the development decision when this decision is divisible.…”

“…As such, one can ask whether the APH result holds in more general settings in which the development decision (i) is being made in a multiperiod setting, and (ii) is divisible. With regard to the multiperiod nature of the development decision, Batabyal (1995Batabyal ( , 1996a, Capozza and Helsley (1990), and Clarke and Reed (1990) have already shown that the prodevelopment bias described by APH does carry over, but in a somewhat modified form.…”