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Open Access Publications from the University of California

Wetlands Mitigation Banks: A Developer's Investment Problem

  • Author(s): Fernandez, Linda M
  • Karp, Larry
  • et al.

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.

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