Wetlands Mitigation Banks: A Developer's Investment Problem

Linda M Fernandez and Larry Karp

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: We study a land developer's decision to invest in a wetlands mitigation bank. The state at which it is optimal to "cash in" the investment in return for restoration credits increases with uncertainty. We calibrate and numerically solve a stochastic control model which describes the developer's investment problem. We study the effect of the parameters of the model on the investment trajectory and the optimal stopping state. A subsidy increases the option value of the investment and the stopping state. A small decrease in the variance of the state dynamics decreases the option value of investment and the stopping state.

Keywords: wetlands mitigation banks; stochastic control; option value (search for similar items in EconPapers)
Date: 1995-03-01
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Working Paper: Wetlands Mitigation Banks: A Developer's Investment Problem (1994)
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