Risk-Aversion and Urban Land Development Options

Abstract

This study examines the possible implications for real options models if developers are risk averse when exercising development options. In our empirical tests using data on first-price auctions of state lands in Singapore, we found evidence of risk aversion among developers, which supports the results of the auction experiments. We derive risk-aversion indices that are discernible from the winner’s curse effects with respect to the auction data and test the predictability of the indices on the developers’ time to development decisions. Our empirical results show that the developers mitigate risks by exercising their development options earlier in the process; thus, the risk neutrality assumption is rejected. According to our results, the developers’ early exercise of development options is not induced by a preemptive motive but is driven by a risk-averse attitude.