This paper presents a new model of urban development in which competing landowners choose when to develop their land and how many houses to build when it is developed. Land is heterogeneous, development is irreversible, future demand is uncertain, and the housing-demand function is flexible enough to include open and closed cities as limiting cases. Local authorities impose a cap on the building density chosen by landowners. If housing demand is inelastic, then otherwise-identical cities with higher density caps supply more housing services and have lower house prices. However, if housing demand is elastic then for some parameter settings there is a range for the density cap in which cities with higher density caps supply fewer housing services and have higher house prices. This can occur if demand is sufficiently volatile or the risk-free interest rate is sufficiently small. The paper's main results survive when landowners also have the option to redevelop their land in the future.
This paper introduces a new framework for evaluating climate-change adaptation projects. This framework incorporates uncertainty surrounding future climatic and economic conditions and allows for Bayesian learning about the magnitude of climate change. The paper uses real options analysis to construct an optimal policy for determining the scale and timing of investment and then evaluates simpler alternative approaches to project evaluation against this benchmark. The performance of standard cost-benefit analysis improves if projects are evaluated less frequently. Rules of thumb involving arbitrary thresholds for the benefit-cost ratio or increments to the social discount rate can capture most of the value of investment flexibility. Approximating the option value of waiting by assuming delayed investment occurs after a fixed delay performs even better, with little increase in difficulty. Basing decisions on a single source of volatility (climatic or economic) leads to even better performance, but the rules are harder to implement.
This project is funded by the Deep South Challenge as part of its “Impacts and implications” research programme.
Growing environmental concerns mean that many farmers will need to change the way they use their land if they are to remain financially viable. However, the debt overhang problem can create situations when profitable land-use changes are not actually in farmers' own best interests. This paper proposes a new form of farm debt that is designed to facilitate profitable changes in land use by highly indebted farms. The proposed form of debt features an early repayment provision that alleviates the debt overhang problem by allowing farmers to retain a greater share of the benefits of land-use changes.
This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.”
This paper introduces a new real options model of farm investment. Farmers in this model have the option to default at times of their choosing. Family-owned farms may also have to default involuntarily. They have limited access to capital ("shallow pockets"), which may force them to default during periods when injections of capital are needed to maintain the farming operation. Both voluntary and involuntary default contribute to a debt overhang problem that is likely to discourage investment in sustainable agriculture. Debt overhang is more problematic when farmers have shallower pockets.
This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.”
This paper discusses banks' potential to increase their shareholders' welfare by attaching more importance to the environmental performance of farm borrowers. Sustainable farm lending can give banks' shareholders direct ESG (environmental, social and governance) benefits that offset any reduction in bank profitability, but there is limited scope to do this as better ESG scores are likely to be associated with small reductions in banks' cost of equity capital. There are several ways in which shareholders can benefit indirectly from sustainable farm-lending practices. Firstly, banks can act as delegated monitors of farms' environmental performance on behalf of farms' customers. Secondly, banks can use sustainable lending to infer borrowers' private information about their default risk. Thirdly, facilitating changes in farming practices can increase farm values. Fourthly, farmers may be able to reduce short-termism by using sustainability-linked loans as commitment devices. All four possibilities potentially increase the value of banks' farm-debt portfolios. Finally, sustainable lending programmes that increase a bank's ESG score might increase the price it receives when it sells bonds to institutional investors, but the evidence reviewed here suggests that any cost savings will be small. The first four opportunities described here are more likely candidates for benefiting banks' shareholders.
This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.”