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Urban Land Development and its Prices: The Effects of Conversion Costs with Redevelopment
Author(s) -
Park Tae H.,
Yoon Suk Heun
Publication year - 1994
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00651
Subject(s) - redevelopment , externality , zoning , economics , demolition , reservation , nash equilibrium , land development , microeconomics , natural resource economics , business , land use , computer science , civil engineering , computer network , engineering
This paper analyzes urban land development when landowners anticipate a future large‐scale redevelopment by a third party developer. Landowners' initial development activities can deter such redevelopment because they impose two conversion costs on the redeveloper: demolition costs and landowners' reservation prices. These costs are eventually borne by the landowners when the developers' market is competitive. For the landowners' initial development activities, we analyze both the efficient solution and the noncooperative solution under the Nash equilibrium. In both cases, the possibility of redevelopment results in a lower level of initial development due to the conversion costs, but increases land prices. However, the magnitude of their effects is smaller in the Nash solution due to an externality. The presence of such an externality provides a rationale for zoning and urban planning.