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This paper presents and validates a novel empirical approach for measuring the value of the option to redevelop using a standard hedonic dataset. Our analysis generalizes the standard hedonic model to account for the option value of reconfiguring hedonic characteristics. We test this model with over 162,000 real estate transactions in 53 towns in Connecticut between 1994 and 2007 by adding a non-linear intensity variable, which increases with the aggregate value of structure and decreases with land value. A conservative estimate is that about 20% of towns have significantly positive option value, with a mean value of 29–34% for properties most similar to vacant land. Multiple tests across towns support predictions of real options theory. Positive option value towns have higher house price volatility and estimated option value varies positively with price volatility, a finding inconsistent with NPV theory. We also find positive association between option value and drift in house prices and a U-shape relation with house price adjusted for structural characteristics. Higher property taxes reduce the value of option to redevelop.


Copyright 2012 Elsevier, Regional Science and Urban Economics

NOTICE: this is the author’s version of a work that was accepted for publication in Regional Science and Urban Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Regional Science and Urban Economics, [42, 1-2, 2012] DOI: 10.1016/j.regsciurbeco.2011.08.007

Publication Title

Regional Science and Urban Economics

Published Citation

Clapp, John M., Katsiaryna Salavei Bardos, and S.K. Wong. 2012. Empirical estimation of the option premium for residential redevelopment. Regional Science and Urban Economics 42 (1-2) 240-256.



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