Uncertainty, Competition and Timing of Land Development : Theory and Empirical Evidence from Hang Zhou, China

Considering the existence of strong policy intervention in China, this paper introduces policy uncertainty into standard Real Options framework, and provides a theoretical explanation for the land development decision in an emerging market. Based on survival analysis, we examine the determinants of timing of land development empirically, using a sample of 783 residential projects in Hangzhou, China from 2005-2011. We use monetary policy indices as measurement of policy environment, and results verify our theoretical prediction that when the expected policy is positive, an increase in policy uncertainty significantly lowers the likelihood of land development, which verifies Grenadier (1996)'s prediction of "Recession-induced Construction Booms." Empirical finding also verify that competition along exerts a negative effect on development timing and also has a positive crossing effect with policy uncertainty