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Real Options and Environmental Policies: The Good, the Bad, and the Ugly

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  • Justus Wesseler
  • Jinhua Zhao

Abstract

The literature on real options shows that irreversibilities, uncertainties about future benefits and costs, and the flexibility in decision making generate benefits and costs of delaying immediate action. When applied to government policy making, real option models can lead to efficient policies that take full account of these trade-offs, but they can also cause strategic behavior that tries to delay policies through influencing important elements such as downside risks. This contribution reviews the latest developments in real option–based policy research by looking at what we know about the benefits from waiting (the good), the costs from waiting (the bad), and how strategic behavior can influence policies (the ugly). Much has been said in the literature about the good and the bad, but more work is needed to study the ugly aspects of real option–driven policies.

Suggested Citation

  • Justus Wesseler & Jinhua Zhao, 2019. "Real Options and Environmental Policies: The Good, the Bad, and the Ugly," Annual Review of Resource Economics, Annual Reviews, vol. 11(1), pages 43-58, October.
    • Handle: RePEc:anr:reseco:v:11:y:2019:p:43-58
    DOI: 10.1146/annurev-resource-100518-094140
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    Cited by:

    1. Marie-Theres von Schickfus, 2021. "Institutional Investors, Climate Policy Risk, and Directed Innovation," ifo Working Paper Series 356, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. David Zilberman & Justus Wesseler, 2023. "Building the Bioeconomy through Innovation, Monitoring and Science‐based Policies," EuroChoices, The Agricultural Economics Society, vol. 22(3), pages 21-25, December.
    3. Justus Wesseler & Gijs Kleter & Marthe Meulenbroek & Kai P. Purnhagen, 2023. "EU regulation of genetically modified microorganisms in light of new policy developments: Possible implications for EU bioeconomy investments," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(2), pages 839-859, June.
    4. Bigerna, Simona & Hagspiel, Verena & Kort, Peter M. & Wen, Xingang, 2023. "How damaging are environmental policy targets in terms of welfare?," European Journal of Operational Research, Elsevier, vol. 311(1), pages 354-372.
    5. Lee, Sangjun & Zhao, Jinhua, 2021. "Adaptation to climate change: Extreme events versus gradual changes," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    6. Maximilian Kardung & Kutay Cingiz & Ortwin Costenoble & Roel Delahaye & Wim Heijman & Marko Lovrić & Myrna van Leeuwen & Robert M’Barek & Hans van Meijl & Stephan Piotrowski & Tévécia Ronzon & Johanne, 2021. "Development of the Circular Bioeconomy: Drivers and Indicators," Sustainability, MDPI, vol. 13(1), pages 1-24, January.
    7. Anthony Heyes & Sandeep Kapur, 2023. "The precautionary principle when project implementation capacity is congestible," Theory and Decision, Springer, vol. 95(4), pages 691-711, November.

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