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Mark Brady. Photo.

Mark Brady

Policy officer

Mark Brady. Photo.

Passive farming and land development : A real options approach

Author

  • Luca Di Corato
  • Mark V. Brady

Summary, in English

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.

Department/s

  • Centre for Environmental and Climate Science (CEC)
  • BECC: Biodiversity and Ecosystem services in a Changing Climate

Publishing year

2019

Language

English

Pages

32-46

Publication/Series

Land Use Policy

Volume

80

Document type

Journal article

Publisher

Elsevier

Topic

  • Agricultural Science

Keywords

  • Bargaining
  • Capitalization
  • Common Agricultural Policy
  • Decoupled payments
  • Real options

Status

Published

Project

  • Rural development through governance of multifunctional agricultural land-use

ISBN/ISSN/Other

  • ISSN: 0264-8377