Rural land development under hyperbolic discounting: a real option approach

This article presents a simple model of land development under uncertainty and hyperbolic discounting. Land kept in rural use pays an uncertain rent, while net returns from land development are known and constant. The landowner is viewed here as a sequence of infinite autonomous selves with time-inconsistent preferences. We solve the underlying noncooperative intra-personal stopping time game under both naïve and sophisticated beliefs about the landowner's time-inconsistency and show that i) land development is accelerated due to his present-biased time preferences and ii) a higher acceleration is associated with sophistication.

This article presents a simple model of land development under uncertainty and hyperbolic discounting. Land kept in rural use pays an uncertain rent, while net returns from land development are known and constant. The landowner is viewed here as a sequence of selves with time-inconsistent preferences. We solve the underlying timing game under both na < ve and sophisticated beliefs about the landowner's time-inconsistency and show that (i) land development is accelerated due to his present-bias and (ii) a higher acceleration is associated with sophistication.