Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2021-02-24
Number: 21-022/IV
Author-Name: Rutger-Jan Lange
Author-Workplace-Name: Erasmus School of Economics
Author-Name: Coen N. Teulings
Author-Workplace-Name: Utrecht University
Title: The option value of vacant land: Don't build when demand for housing is booming
Abstract: Urban structures and urban growth rates are highly persistent. This has far-reaching implications for the optimal size and timing of new construction. We prove that rational developers postpone construction not because prospects are gloomy, but because they are bright. The slow mean reversion in urban growth rates for the Netherlands and the United States (estimated at 0.07 per annum) implies that a substantial share of cities should optimally postpone construction due to high growth. Observed heterogeneity in floorspace density across cities can be explained not by differences in population levels, but in growth rates.
Classification-JEL: D81, G12, R14, R31, R51
Keywords: irreversible investment, mean-reverting growth, real-estate construction, real options, urban growth
File-URL: https://papers.tinbergen.nl/21022.pdf
File-Format: application/pdf
File-Size: 784737 bytes
Handle: RePEc:tin:wpaper:20210022