The Option Value of Vacant Land
19 Pages Posted: 19 Dec 2006
Date Written: March 2006
Option theory offers a useful way of modeling land value under uncertainty. While this approach underlies much theoretical analysis, the unanswered question is, to what extent does the market value of land reflect this option value? This paper exploits a unique natural experiment to obtain the first direct estimates of the option value of land based on observed transactions. Comparing land sold under constraints that strip away real options to land sold in the same market without such restrictions, we find that approximately 45% of the market value of developable land represents the value of these embedded real options.
Keywords: option value, vacant land value
JEL Classification: D44, G13, R33
Suggested Citation: Suggested Citation