This dissertation consists of three essays wherein tools of financial econometrics are used to study the three aspects of farmland valuation puzzle: short-term boom-bust cycles, overpricing of farmland, and inconclusive effects of direct government payments. Essay I addresses the causes of unexplained short-term boom-bust cycles in farmland values in a dynamic land pricing model (DLPM). The analysis finds that gross return rate of farmland asset decreases as the farmland asset level increases, and that the diminishing return function of farmland asset contributes to the boom-bust cycles in farmland values. Furthermore, it is mathematically proved that land values are potentially unstable under diminishing return functions. We also find that intertemporal elasticity of substitution, risk aversion, and transaction costs are important determinants of farmland asset values. Essay II examines the apparent overpricing of farmland by decomposing the forecast error variance of farmland prices into forward looking and backward looking components. The analysis finds that in the short run, the forward looking Capital Asset Pricing Model (CAPM) portion of the forecast errors are significantly higher in a boom or bust stage than in a stable stage. This shows that the farmland market absorbs economic information in a discriminative manner according to the stability of the market, and the market (and actors therein) responds to new information gradually as suggested by the theory. This helps to explain the overpricing of farmland, but this explanation works primarily in the short run. Finally, essay III investigates the duel effects of direct government payments and climate change on farmland values. This study uses a smooth coefficient semi-parametric panel data model. The analysis finds that land valuation is affected by climate change and government payments, both through discounted revenues and through effects on the risk aversion of land owners. This essay shows that including heterogeneous risk aversion is an efficient way to mitigate the impacts of misspecifications in a DLPM, and that precipitation is a good explanatory variable. In particular, precipitation affects land values in a bimodal manner, indicating that farmland prices could have multiple peaks in precipitation due to adaption through crop selection and technology alternation. The electronic version of this dissertation is accessible from http://hdl.handle.net/1969.1/150974

This dissertation develops three topics in public economics. My research interest in agricultural land value originates from the observation that farmland values have risen throughout much of the Corn Belt and Northern Plains over the last decade. In contrast to the previous studies relying on surveys of agricultural producers, my study utilizes precise information from GIS databases. A hedonic model is estimated to determine the effect of proximity to local markets for crops on farmland value. Correcting for endogeneity of ethanol plant locations, I provide evidence that property values in Central Nebraska are substantially affected by proximity to multiple local markets.

Market land prices ignore the non-market value of ecosystem goods and services; hence, too much agricultural land may be developed. Correct land valuation must include these non-market values. Values of ecosystem services provided by the Richland-Chambers constructed wetlands are assessed through meta-analysis to derive confidence intervals for the willingness-to-pay (WTP) for wetland services. Replacement costs are also used to estimate cost savings of creating wetlands to cleanse river water instead of constructing a conventional wastewater treatment facility. Benefit transfer is used to estimate WTP for non-market agricultural land amenities. Ecosystem services of runoff in the western and recharge in the eastern part of Comal County based on hydrological models are also calculated. Finally, seemingly unrelated regression is used to quantify the effects of growth on current agricultural land values in Texas. Using two different meta-analysis transfer functions, mean WTP for the Richland-Chambers wetlands are $843 and $999 / acre / year. Estimated 95% confidence interval is $95 to $7,435 / acre / year. This confidence interval clearly indicates the uncertainty associated with valuing ecosystem goods and services. The replacement cost of the Richland?Chambers constructed wetlands is estimated to be $1,688 / acre / year. Aggregate WTP to preserve farm and ranchland non-market amenities in Comal County is estimated to be $1,566 / acre. Using hydrologic models, the runoff is valued at $79 / acre, whereas, recharge value is $1,107 / acre. Development will cause a change in recharge, runoff, and pollution which will decrease societal welfare by $1,288 / acre. Seemingly unrelated regression results show that a percentage increase in population growth in the closest metropolitan statistical area (MSA) is associated with increases in land values of approximately $2 / acre. A one-mile increase in distance from the nearest MSA decreased land values by $4 / acre in 1997, $6 / acre in 2002, and $8 / acre in 2007. The diversity of studies illustrates that a cookbook type of methodology is not appropriate for valuing ecosystem goods and services. On the other hand, development contributes positively to land values through encroachment on agricultural lands.