Passive farming and land development: A real options approach

Luca Di Corato and Mark Brady

Land Use Policy, 2019, vol. 80, issue C, 32-46

Abstract: The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.

Keywords: Common Agricultural Policy; Decoupled payments; Capitalization; Real options; Bargaining (search for similar items in EconPapers)
JEL-codes: C61 Q15 R14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Passive farming and land development: a real option approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:lauspo:v:80:y:2019:i:c:p:32-46

DOI: 10.1016/j.landusepol.2018.09.029

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