A General Equilibrium Model of Environmental Option Values
AbstractIn this paper we consider the option value of the environment employing a general equilibrium growth model with a stochastic technology. In our model, as in existing studies, because of irreversibility, the environment has significant real option value. However, unlike the existing literature in which the uncertainty of the value of the environment is given exogenously, the value of the environment is endogenously determined. In our model, the elasticity of substitution eta between the environment and consumption plays a crucial role. We show that the option value, and hence, the optimal decision are both affected by eta not only quantitatively but also qualitatively.
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Bibliographic InfoPaper provided by Department of Economics, University of Kent in its series Studies in Economics with number 1107.
Date of creation: Apr 2011
Date of revision:
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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-CFN-2011-04-30 (Corporate Finance)
- NEP-DGE-2011-04-30 (Dynamic General Equilibrium)
- NEP-ENV-2011-04-30 (Environmental Economics)
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