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Abstract
This paper explores the concept of agricultural resilience in the context of climate change related
water scarcity. Specifically, the impact of water scarcity on agricultural production is analyzed
to derive the timing of exit decisions for farmers faced with the prospect of declining
profitability in agriculture but increasing benefits from land rezoning in future. The prospects of
land rezoning are modeled as a poison process which may or may not be influenced by farmer’s
water abstraction decisions. Selling out of agriculture before land rezoning has an impatience
cost as the farmer does not gain the maximum speculative rewards. The analysis highlights the
role of such speculative rewards in making farmers resilient to declining profitability in
agriculture and also identifies the circumstances under which the water prices may be an
ineffective policy tool for allocating water. An empirical application is performed using the
above model for the case of a drought prone region in Western Australia.