Heterogenous Expectations and Farmland Prices

Abstract

Abstract This paper examines the effect of heterogenous expectations about the future among potential farmland buyers. It is optimal for each seller to have a reservation price in excess of the value he attaches to the future stream of income attributable to owning the land if he thinks that some potential buyers may be more optimistic than he. A formula for the optimal reservation price is presented, and a numerical illustration is shown. An extremely preliminary empirical test using Corn Belt and Lake State data is made of the importance of optimists in determining land prices for 1968–81.