URBAN LAND-DEVELOPMENT AND ITS PRICES - THE EFFECTS OF CONVERSION COSTS WITH REDEVELOPMENT

This paper analyzes urban land development when landowners anticipate a future large-scale redevelopment by a third party developer. Landown ers' initial development activities can deter such redevelopment becau se they impose two conversion costs on the redeveloper: demolition cos ts and landowners' reservation prices. These costs are eventually born e by the landowners when the developers' market is competitive. For th e landowners' initial development activities, we analyze both the effi cient solution and the noncooperative solution under the Nash equilibr ium. In both cases, the possibility of redevelopment results in a lowe r level of initial development due to the conversion costs, but increa ses land prices. However, the magnitude of their effects is smaller in the Nash solution due to an externality. The presence of such an exte rnality provides a rationale for zoning and urban planning.