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Quasi-option value under strategic interactions

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  • Fujii, Tomoki
  • Ishikawa, Ryuichiro

Abstract

We consider a simple two-period model of irreversible investment under strategic interactions between two players. In this setup, we show that the quasi-option value may cause some conceptual difficulties. In case of asymmetric information, decentralized investment decisions fail to induce first-best allocations. Therefore a regulator may not be able to exercise the option to delay the decision to develop. We also show that information-induced inefficiency may arise in a game situation and that under certain assumptions inefficiency can be eliminated by sending asymmetric information to the players, even when the regulator faces informational constraints. Our model is potentially applicable to various global environmental problems.

Suggested Citation

  • Fujii, Tomoki & Ishikawa, Ryuichiro, 2012. "Quasi-option value under strategic interactions," Resource and Energy Economics, Elsevier, vol. 34(1), pages 36-54.
    • Handle: RePEc:eee:resene:v:34:y:2012:i:1:p:36-54
    DOI: 10.1016/j.reseneeco.2011.09.002
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    References listed on IDEAS

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    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    More about this item

    Keywords

    Biodiversity; Irreversibility; Quasi-option value; Uncertainty; Value of information;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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