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Quasi-option value under ambiguity

Author

Listed:
  • Marcello Basili

    (Department of Economics, University of Siena)

  • Fulvio Fontini

    (Department of Economics, University of Padua)

Abstract

Real investments involving irreversibility and ambiguity embed a positive quasi-option value under ambiguity (q.o.v.a.), which modifies the evaluation of an investment decision involving depletion of natural resources by increasing the value of delaying. Q.o.v.a. depends on the specific decision-maker attitude towards ambiguity, expressed by a capacity on the state space. An empirical measure of q.o.v.a. is pointed out. Exploiting the properties of a capacity and its conjugate, the relationship has been established between the upper and lower Choquet integral with respect to a subadditive capacity and the bid and ask price of the underlying asset (output) of the investment decision. The empirical measure of q.o.v.a. is defined as the upper bound of the opportunity value. As an example, q.o.v.a. is applied to evaluate an off-shore petroleum lease under ambiguity.

Suggested Citation

  • Marcello Basili & Fulvio Fontini, 2005. "Quasi-option value under ambiguity," Economics Bulletin, AccessEcon, vol. 4(3), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-05d80003
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    References listed on IDEAS

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation

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