Discussion Paper Details

Please find the details for DP16023 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The option value of vacant land: Don't build when demand for housing is booming

Author(s): Rutger-Jan Lange and Coen N Teulings

Publication Date: April 2021

Keyword(s): Irreversible investment, mean-reverting growth, real options, real-estate construction and urban growth

Programme Area(s): Financial Economics and International Trade and Regional Economics

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. For cities that are growing, a positive growth shock causes rational investors not to speed up investment but rather to postpone it. In our model, the observed heterogeneity in floorspace density between cities can be explained not by differences in population levels, but in growth rates.

For full details and related downloads, please visit:

Bibliographic Reference

Lange, R and Teulings, C. 2021. 'The option value of vacant land: Don't build when demand for housing is booming'. London, Centre for Economic Policy Research.