This paper models the impact of water scarcity in agriculture on the timing of exit decisions for farmers faced with the prospect of declining profitability in agriculture but increasing benefits from land rezoning in the future. The prospects of land rezoning are modeled as a Poisson process. The analysis highlights the role of speculative rewards in making farmers resilient to declining profitability in agriculture and also identifies the circumstances under which water prices may become an ineffective policy tool for allocating water. An empirical application is performed for the case of a drought prone region in Western Australia. Results indicate that when the chances of urbanization are low, it is more profitable to exit agriculture sooner than later as the expected rewards from urbanization are superseded by the current losses in agriculture. Also, water pricing as a mechanism for promoting efficient water use may not work in the presence of speculative rewards from urbanization.
- agricultural resilience,
- exit timing,
- water scarcity,
- climate change,
Available at: http://works.bepress.com/ram_ranjan/8/