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Groundwater Extraction in the South Korea’s Jeju Island: A Real Options Game Approach under Price Uncertainty

Author

Listed:
  • Jaehyung Lee

    (ESG Innovation Center, SK Telecom, Seoul-si 04539, Korea)

  • Heesun Jang

    (Department of Economics, Jeonbuk National University, Jeonju-si 54896, Korea)

Abstract

This paper uses a standard non-cooperative sequential game with two homogeneous players to analyze investment options of groundwater development project in South Korea’s Jeju island. The model is constructed as an option game taking the uncertainty of water price and the irreversibility of investment into account. The results show that the threshold water price of follower increases with the investment scale of both the leader and the follower while the threshold water price for the leader decreases as the investment scale of the leader increases. This makes the leader choose strategies to maximize the amount of groundwater extraction regardless of the follower’s strategy. Based on the results, it is recommended for policymakers to manage sustainable use of groundwater based on the policy measures such as the groundwater extraction quota system.

Suggested Citation

  • Jaehyung Lee & Heesun Jang, 2021. "Groundwater Extraction in the South Korea’s Jeju Island: A Real Options Game Approach under Price Uncertainty," Sustainability, MDPI, vol. 13(6), pages 1-11, March.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:6:p:3431-:d:520591
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    References listed on IDEAS

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    Cited by:

    1. Antonio Di Bari & Giovanni Villani, 2023. "An Options Game approach to valuate broadband projects in a smart city context," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(2), pages 1587-1601, April.

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