The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent
AbstractFisher [2000, this journal] offers a unifying framework for two concepts of (quasi-) option value suggested by Arrow, Fisher, Hanemann, and Henry (AFHH) on the one hand, and by Dixit and Pindyck (DP) on the other, and claims these two concepts to be equivalent. We show that this claim is not correct and point out the flaws in Fisher's proof. We further suggest a decomposition of the DP option value into two components, one of which corresponds exactly to the AFHH option value which captures the value of obtaining new information, and a second one which captures the postponement value irrespective of uncertainty. --
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Bibliographic InfoPaper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2003,09.
Date of creation: 2003
Date of revision:
option value; quasi option value; decision under uncertainty; irreversible investment;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
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- Iulie Aslaksen & Terje Synnestvedt, 2004. "Are the Dixit-Pindyck and the Arrow-Fisher-Henry-Hanemann Option Values Equivalent?," Discussion Papers 390, Research Department of Statistics Norway.
- Mensink, Paul, 2004. "A comment on "An arbitrage-free approach to quasi-option value" by Coggins and Ramezani," Economics Working Papers 2004,06, Christian-Albrechts-University of Kiel, Department of Economics.
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