Department of Agricultural and Resource Economics
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.