In this dissertation, we study the effects of emerging biomass markets on land use changes between alternatives of agricultural production, conventional timber production, and forest woody biomass production for energy use. Along with the uncertainty associated with woody biomass prices and rents, transaction costs incurred to land use play an important role in land allocation decisions and make this study distinct from other work. In Chapter 1, we introduce the background and objectives of our study. In Chapter 2, we analyze the behavior of a risk-neutral private landowner and social planner under uncertainty of woody biomass prices, assuming that there is a market emergence at some unknown time point in the future. Market emergence is characterized by a price jump and a certain timing of the price jump. Six different price jumps and five different timings of bioenergy market emergence are adopted to study their collective effects on land use change between agriculture and forestry. Chapter 3 studies this problem for a risk-averse private landowner. Two measures of relative risk aversion are used to examine how a landowner's preference may affect his or her land use decision.

In Chapter 2, we find that, for three different quality categories of land, land rents from forestry increase significantly for higher price jumps and decreases in the length of time until bioenergy market emergence. One of the most important results is concerned with the presence of transaction costs. Here, we find that these costs may require unrealistic market emergence scenarios to lead to bioenergy adoption on any large scale.

This result is even more likely with nonlinear transaction costs. Land allocation decisions in Chapter 3 are distinctly different from those in Chapter 2, due to the introduction of landowner risk aversion. In certain market emergence cases, some land units retain in agriculture entirely when the landowner is risk averse .

The Chapter 4 studies a stochastic optimization problem of land use, assuming that woody biomass rents follow a stochastic diffusion called geometric Brownian motion that is later discretized by a binomial option pricing approach. The problems in Chapters 2 and 3 assume that the landowner must make all decisions at the beginning of his or her time horizon. This assumption is relaxed in Chapter 4. Now, the landowner is allowed to revise his or her land allocation decision among three alternatives over time as information about market emergence is collected. We observe that the different forms of transaction costs are not as significant as in Chapters 2 and 3. However, different values of volatility of forest biomass rents give rise to different land allocation decisions, especially for the land of high quality.