THE INCONSISTENCY OF LAND VALUES, LAND RENTS, AND CAPITALIZATION FORMULAS

This paper examines relationships that exist between farm income, land values, and capital asset pricing theory. Using two commonly referenced data sets, it is shown that land prices and land rents do not have the same time-series representations, a necessary condition for the simple capital asset pricing theory to hold. This suggests that a fundamental rethinking of the way in which land prices are viewed and modeled is needed. More complex models that allow for rational bubbles, risk aversion, and future shifts in government policy or commodity prices may be required.