This article compares the effects of various fiscal policies on choices of development timing and... more This article compares the effects of various fiscal policies on choices of development timing and capital intensity when rents on housing follow geometric Brownian motion with those when rents follow arithmetic Brownian motion. These policy instruments include fees on capital, housing, and land, and taxes on urban income, and properties both before and after development. Regardless of the motion of rents, when one choice is fixed, the effects of these policy instruments on the other choice are qualitatively the same. When the two choices are determined endogenously, although these policy instruments exhibit the same qualitative effect on the choice of development timing, they may exhibit different effects on the choice of capital intensity if rents on housing follow different types of motions.
tw. The authors are grateful for helpful comments on an earlier draft by Tsur Sommerville, John H... more tw. The authors are grateful for helpful comments on an earlier draft by Tsur Sommerville, John Harding and by participants in workshops in Vancouver, BC and Macao, China.
ABSTRACT In Rosen’s (1974) model, implicit market prices can be interpreted as the present values... more ABSTRACT In Rosen’s (1974) model, implicit market prices can be interpreted as the present values of rents per unit of each hedonic characteristic. But when rents rise, there may be substantial value associated with the option to redevelop the bundle of characteristics to higher intensity. In the presence of option value, hedonic regressions should include an additional non-negative term for the value of the option. If this option term is omitted, then estimates of implicit market prices for a positively valued characteristic will be biased downward. We use simulations to compare the standard hedonic regression to a nonlinear regression designed to produce consistent estimators of implicit prices and to estimate the value of the redevelopment option. The simulations show substantial downward bias even in the presence of small amounts of option value. Moreover, nonlinear estimation can do a good job of recovering the amount of option value and estimates of implicit market prices.
In the hedonic model, implicit market prices can be interpreted as the present values of rents pe... more In the hedonic model, implicit market prices can be interpreted as the present values of rents per unit of each hedonic characteristic. But when rents rise, there may be substantial value associated with the option to redevelop to higher intensity per unit land value. In the presence of option value, we first demonstrate that hedonic linear regressions should include an additive nonnegative term for the value of the option. This term increases in the variance of the underlying stochastic process. If this term is omitted, then estimates of implicit market prices for desirable (undesirable) characteristics will be biased downward (upward). This prediction is supported by recent empirical studies. We further suggest that future empirical work can employ the nonlinear functional form derived from our theory.
This article assumes that a firm facing technological uncertainty must decide whether to purchase... more This article assumes that a firm facing technological uncertainty must decide whether to purchase R&D capital at each instant. R&D capital exhibits both irreversibility and externality through the learning-bydoing effect. The combination of irreversibility and uncertainty drives agents to be more prudent; the maxim`better safe than sorry' applies. This maxim is more important if uncertainty is greater, technology progresses at a lower pace, the externality is stronger, or a catastrophic event is less likely to occur. A firm ignoring the externality will both invest later and disinvest earlier than a social planner who internalizes the externality. An equal rate of investment tax credits should be given to both costlessly reversible investments and irreversible ones, and the same rate of taxation should be imposed on disinvestment.
The Journal of Real Estate Finance and Economics, 2014
This article investigates how density ceiling controls affect housing prices and the boundary of ... more This article investigates how density ceiling controls affect housing prices and the boundary of a monocentric city that has a fixed level of population. We employ a real options model in which each landowner owns one unit parcel of land, and simultaneously chooses the timing and structural density of development. The landowner develops his vacant land by incurring up-front costs that are not recoverable, and then receives urban rents after development that are stochastic over time. Unlike previous literature, this article finds that density ceiling controls may decrease housing prices. This article also finds that uncertainty in urban rents aggrevates the spatial expansion problem led by density ceiling controls.
The Journal of Real Estate Finance and Economics, 2009
This paper investigates how a development moratorium affects choices of development timing and la... more This paper investigates how a development moratorium affects choices of development timing and land values in a framework where both the value of developed property evolves stochastically and the development costs are fully irreversible. We assume that a regulator initially announces that land is not allowed to develop during a finite period of time in the future. A developer thus must decide whether to develop land before the timing ordinance is imposed or after it expires. The development moratorium reduces the developer' s option value from waiting, and thus accelerates development. We also use simulation analysis to demonstrate how the other factors that relate to the demand and supply conditions of the real estate market affect this accelerating effect.
This article investigates how a policy-maker should choose a density ceiling and how the optimal ... more This article investigates how a policy-maker should choose a density ceiling and how the optimal policy is affected by the underlying demand and technology parameters. We assume that developed properties reduce open space, and thereby harm urban residents. However, landowners will ignore this negative externality, and will thus develop property more densely than is socially optimal. A regulator can correct this by imposing a density ceiling control. The regulator should force developers to develop less densely when (1) land development becomes less risky, (2) the development costs are expected to grow more rapidly, and (3) the rents of undeveloped land are lower. This is because under these three scenarios, a social planner will choose to develop vacant land sooner, and thereby develop it less densely.
Journal of Financial and Quantitative Analysis, 2008
This paper examines a firm's debt level, investment timing, and investment scale choices in a... more This paper examines a firm's debt level, investment timing, and investment scale choices in a continuous-time model where the output price of a good that the firm produces depends on a stochastic demand-shift variable and the total industry supply of the good. Using the simple symmetric Cournot-Nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies, we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest. We also demonstrate how uncertainty, bankruptcy costs, and corporate taxation affect the firm's financing and investment decisions.
... Jyh-Bang Jou a b & Tan (Charlene) Lee c * Available online: 31 Jan 2011. ... 1 Irreversib... more ... Jyh-Bang Jou a b & Tan (Charlene) Lee c * Available online: 31 Jan 2011. ... 1 Irreversibility occurs not only in real investment, but also in employment decisions, because the costs of hiring and firing are largely sunk. See, for example, Ostbye (1998) and Chen and Cheng (2005). ...
Journal of Business Finance & Accounting, 2004
This article compares the investment and financing decisions of a firm that adopts a 'first-best'... more This article compares the investment and financing decisions of a firm that adopts a 'first-best' strategy with those of a firm that adopts a 'secondbest' strategy. The former issues bonds upon deciding an initial capacity, while the latter issues bonds, and only then decides an initial capacity. The former is thus able to avoid the agency cost associated with the 'debt overhang' problem. Accordingly, the former will both issue more bonds and install a larger initial capacity than the latter. However, the agency cost of debt, i.e., firm value difference between these two strategies, is modest for plausible parameter values.
In the context of internationalization, we study the impact of a firm's breadth and depth on ... more In the context of internationalization, we study the impact of a firm's breadth and depth on its performance using quantile regression. Quantile regression allows us to study the effects of internationalization on performance at various quantiles of conditional performance distribution. Our results suggest that breadth (measured by the number of foreign countries where a firm has direct investments) has positive effects on firm performance (measured by Tobin's Q) and depth (measured by the number of foreign investment sites in top two countries divided by total number of foreign investment sites) is negatively correlated with firm performance. The quantile regression analysis also shows that the impacts of breadth and depth are heterogeneous across levels of performance. The implication is that, for firms with high performances, their performances are sensitive to internationalization activities; however, for firms with low performances, the stock market barely recognizes th...
This article compares the effects of various fiscal policies on choices of development timing and... more This article compares the effects of various fiscal policies on choices of development timing and capital intensity when rents on housing follow geometric Brownian motion with those when rents follow arithmetic Brownian motion. These policy instruments include fees on capital, housing, and land, and taxes on urban income, and properties both before and after development. Regardless of the motion of rents, when one choice is fixed, the effects of these policy instruments on the other choice are qualitatively the same. When the two choices are determined endogenously, although these policy instruments exhibit the same qualitative effect on the choice of development timing, they may exhibit different effects on the choice of capital intensity if rents on housing follow different types of motions.
tw. The authors are grateful for helpful comments on an earlier draft by Tsur Sommerville, John H... more tw. The authors are grateful for helpful comments on an earlier draft by Tsur Sommerville, John Harding and by participants in workshops in Vancouver, BC and Macao, China.
ABSTRACT In Rosen’s (1974) model, implicit market prices can be interpreted as the present values... more ABSTRACT In Rosen’s (1974) model, implicit market prices can be interpreted as the present values of rents per unit of each hedonic characteristic. But when rents rise, there may be substantial value associated with the option to redevelop the bundle of characteristics to higher intensity. In the presence of option value, hedonic regressions should include an additional non-negative term for the value of the option. If this option term is omitted, then estimates of implicit market prices for a positively valued characteristic will be biased downward. We use simulations to compare the standard hedonic regression to a nonlinear regression designed to produce consistent estimators of implicit prices and to estimate the value of the redevelopment option. The simulations show substantial downward bias even in the presence of small amounts of option value. Moreover, nonlinear estimation can do a good job of recovering the amount of option value and estimates of implicit market prices.
In the hedonic model, implicit market prices can be interpreted as the present values of rents pe... more In the hedonic model, implicit market prices can be interpreted as the present values of rents per unit of each hedonic characteristic. But when rents rise, there may be substantial value associated with the option to redevelop to higher intensity per unit land value. In the presence of option value, we first demonstrate that hedonic linear regressions should include an additive nonnegative term for the value of the option. This term increases in the variance of the underlying stochastic process. If this term is omitted, then estimates of implicit market prices for desirable (undesirable) characteristics will be biased downward (upward). This prediction is supported by recent empirical studies. We further suggest that future empirical work can employ the nonlinear functional form derived from our theory.
This article assumes that a firm facing technological uncertainty must decide whether to purchase... more This article assumes that a firm facing technological uncertainty must decide whether to purchase R&D capital at each instant. R&D capital exhibits both irreversibility and externality through the learning-bydoing effect. The combination of irreversibility and uncertainty drives agents to be more prudent; the maxim`better safe than sorry' applies. This maxim is more important if uncertainty is greater, technology progresses at a lower pace, the externality is stronger, or a catastrophic event is less likely to occur. A firm ignoring the externality will both invest later and disinvest earlier than a social planner who internalizes the externality. An equal rate of investment tax credits should be given to both costlessly reversible investments and irreversible ones, and the same rate of taxation should be imposed on disinvestment.
The Journal of Real Estate Finance and Economics, 2014
This article investigates how density ceiling controls affect housing prices and the boundary of ... more This article investigates how density ceiling controls affect housing prices and the boundary of a monocentric city that has a fixed level of population. We employ a real options model in which each landowner owns one unit parcel of land, and simultaneously chooses the timing and structural density of development. The landowner develops his vacant land by incurring up-front costs that are not recoverable, and then receives urban rents after development that are stochastic over time. Unlike previous literature, this article finds that density ceiling controls may decrease housing prices. This article also finds that uncertainty in urban rents aggrevates the spatial expansion problem led by density ceiling controls.
The Journal of Real Estate Finance and Economics, 2009
This paper investigates how a development moratorium affects choices of development timing and la... more This paper investigates how a development moratorium affects choices of development timing and land values in a framework where both the value of developed property evolves stochastically and the development costs are fully irreversible. We assume that a regulator initially announces that land is not allowed to develop during a finite period of time in the future. A developer thus must decide whether to develop land before the timing ordinance is imposed or after it expires. The development moratorium reduces the developer' s option value from waiting, and thus accelerates development. We also use simulation analysis to demonstrate how the other factors that relate to the demand and supply conditions of the real estate market affect this accelerating effect.
This article investigates how a policy-maker should choose a density ceiling and how the optimal ... more This article investigates how a policy-maker should choose a density ceiling and how the optimal policy is affected by the underlying demand and technology parameters. We assume that developed properties reduce open space, and thereby harm urban residents. However, landowners will ignore this negative externality, and will thus develop property more densely than is socially optimal. A regulator can correct this by imposing a density ceiling control. The regulator should force developers to develop less densely when (1) land development becomes less risky, (2) the development costs are expected to grow more rapidly, and (3) the rents of undeveloped land are lower. This is because under these three scenarios, a social planner will choose to develop vacant land sooner, and thereby develop it less densely.
Journal of Financial and Quantitative Analysis, 2008
This paper examines a firm's debt level, investment timing, and investment scale choices in a... more This paper examines a firm's debt level, investment timing, and investment scale choices in a continuous-time model where the output price of a good that the firm produces depends on a stochastic demand-shift variable and the total industry supply of the good. Using the simple symmetric Cournot-Nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies, we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest. We also demonstrate how uncertainty, bankruptcy costs, and corporate taxation affect the firm's financing and investment decisions.
... Jyh-Bang Jou a b & Tan (Charlene) Lee c * Available online: 31 Jan 2011. ... 1 Irreversib... more ... Jyh-Bang Jou a b & Tan (Charlene) Lee c * Available online: 31 Jan 2011. ... 1 Irreversibility occurs not only in real investment, but also in employment decisions, because the costs of hiring and firing are largely sunk. See, for example, Ostbye (1998) and Chen and Cheng (2005). ...
Journal of Business Finance & Accounting, 2004
This article compares the investment and financing decisions of a firm that adopts a 'first-best'... more This article compares the investment and financing decisions of a firm that adopts a 'first-best' strategy with those of a firm that adopts a 'secondbest' strategy. The former issues bonds upon deciding an initial capacity, while the latter issues bonds, and only then decides an initial capacity. The former is thus able to avoid the agency cost associated with the 'debt overhang' problem. Accordingly, the former will both issue more bonds and install a larger initial capacity than the latter. However, the agency cost of debt, i.e., firm value difference between these two strategies, is modest for plausible parameter values.
In the context of internationalization, we study the impact of a firm's breadth and depth on ... more In the context of internationalization, we study the impact of a firm's breadth and depth on its performance using quantile regression. Quantile regression allows us to study the effects of internationalization on performance at various quantiles of conditional performance distribution. Our results suggest that breadth (measured by the number of foreign countries where a firm has direct investments) has positive effects on firm performance (measured by Tobin's Q) and depth (measured by the number of foreign investment sites in top two countries divided by total number of foreign investment sites) is negatively correlated with firm performance. The quantile regression analysis also shows that the impacts of breadth and depth are heterogeneous across levels of performance. The implication is that, for firms with high performances, their performances are sensitive to internationalization activities; however, for firms with low performances, the stock market barely recognizes th...
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