Common-Property Resource Exploitation: A Real Options Approach

Abstract

Agricultural land and forestlands can have multiple uses and generate multiple sources of utility. Although landowners benefit from most of them, society can benefit from others because of their intrinsic characteristics as common-property resources and customary practice. In many Italian territories, the picking of mushrooms is allowed on privately owned agricultural land and in forests. The management of these resources is challenging due to the emerging conflicts between landowners and users. In addition, the pressure exerted by users gives rise to issues on stock preservation, thus contributing to putting biodiversity at risk in contexts already heavily jeopardized by modern agriculture. Through the years, regulation established the primacy of the landowner’s right, introduced a permit fee for users, and set limits on the resource stock to be collected daily. Nonetheless, the relationship between public and private interests in common-property resource exploitation is still controversial. In this paper, we investigate and model a right holder’s decision whether to exploit a common-property resource according to their actual status of being an actual or potential user. The model is developed within the real options valuation framework. In detail, we investigate the entry/exit decision on the exploitation of the resource by considering the uncertainty that affects the resource stock, the entry/exist costs, and the number of rival users.