AN ARBITRAGE-FREE APPROACH TO QUASI-OPTION VALUE; Proceedings of the Fifth Joint Conference on Agriculture, Food, and the Environment, June 17-18, 1996, Padova, Italy
In the presence of uncertainty and irreversibility, dynamic decision problems should not be solved using expected net present value analysis. The right to delay a decision can be valuable. We show that the value of this right equals Arrow and FisherÂs (1974) quasi-option value. In a discrete model we show how to derive quasi-option value using methods from finance, methods that remove altogether the need to take expected values of future stochastic variables. Two main findings are presented. First, if the stochastic dynamic process underlying the problem is known, the Arrow and Fisher and Henry (1974) result that improper use of net present value leads to too much early development, is correct. Second, if the process is not known perfectly, their result can be incorrect in the sense that net present value methods lead to the correct outcome while the dynamic rule does not.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Minnesota, Center for International Food and Agricultural Policy in its series Working Papers with number
14469.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: