Exit Timing Decisions under Land Speculation and Resource Scarcity in Agriculture

This paper explores the concept of agricultural resilience in the context of climate change relatedwater scarcity. Specifically, the impact of water scarcity on agricultural production is analyzedto derive the timing of exit decisions for farmers faced with the prospect of decliningprofitability in agriculture but increasing benefits from land rezoning in future. The prospects ofland rezoning are modeled as a poison process which may or may not be influenced by farmer’swater abstraction decisions. Selling out of agriculture before land rezoning has an impatiencecost as the farmer does not gain the maximum speculative rewards. The analysis highlights therole of such speculative rewards in making farmers resilient to declining profitability inagriculture and also identifies the circumstances under which the water prices may be anineffective policy tool for allocating water. An empirical application is performed using theabove model for the case of a drought prone region in Western Australia.