Real option valuation of abandoned farmland

This paper investigates the decision-making process of an owner of abandoned farmland that is currently restricted to agricultural use but will be available for nonagricultural use in the future. I make a real option valuation of the abandoned farmland taking prospective land conversion into consideration. Results from the model calibration demonstrate that a slight probability of land conversion greatly increases the land value and discourages the owner from cultivating the land. Further, the results show that a small gap in the anticipation of land conversion prevents the owner from selling or leasing the land to a more efficient farmer.