Passive farming and land development : A real options approach
Di Corato, Luca and Brady, Mark V. LU
(2019)
In Land Use Policy
80.
p.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... (More)
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.
(Less)
- author
- Di Corato, Luca
and Brady, Mark V.
LU
- organization
- publishing date
- 2019
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Bargaining, Capitalization, Common Agricultural Policy, Decoupled payments, Real options
- in
- Land Use Policy
- volume
- 80
- pages
- 15 pages
- publisher
- Elsevier
- external identifiers
-
- scopus:85054284610
- ISSN
- 0264-8377
- DOI
- 10.1016/j.landusepol.2018.09.029
- project
- Rural development through governance of multifunctional agricultural land-use
- language
- English
- LU publication?
- yes
- id
- 0bc72a3d-79fc-4154-9fc8-145138d3d8f3
- date added to LUP
- 2018-10-26 13:19:34
- date last changed
- 2022-04-17 23:44:26
@article{0bc72a3d-79fc-4154-9fc8-145138d3d8f3,
abstract = {{<p>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.</p>}},
author = {{Di Corato, Luca and Brady, Mark V.}},
issn = {{0264-8377}},
keywords = {{Bargaining; Capitalization; Common Agricultural Policy; Decoupled payments; Real options}},
language = {{eng}},
pages = {{32--46}},
publisher = {{Elsevier}},
series = {{Land Use Policy}},
title = {{Passive farming and land development : A real options approach}},
url = {{http://dx.doi.org/10.1016/j.landusepol.2018.09.029}},
doi = {{10.1016/j.landusepol.2018.09.029}},
volume = {{80}},
year = {{2019}},
}