Economics Research Institute Study Paper
Utah State University Department of Economics
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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.
Batabyal, Amitrajeet A. and Biswas, Basudeb, "Endogenizing the Reservation Value in Models of Land Development Over Time and Under Uncertainty" (2004). Economic Research Institute Study Papers. Paper 292.