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Uncertainty and Option Value in Land Allocation Problems

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  • Vincenzina Messina
  • Valentina Bosetti

Abstract

In this paper we are concerned with modelling techniques for evaluating development and conservation opportunities when dealing with investment decisions involving environmental resources management. In this context, highly characterized by both environmental and economic uncertainty, we emphasize the importance of capturing the flexibility of different investment strategies. In particular, we discuss a discrete model that includes both environmental and economic uncertainty treated using an integrated approach. Decision analysis techniques and option pricing theory are jointly applied to evaluate development versus conservation opportunities. In our analysis, we take into account how uncertainty interacts with two types of irreversibility: sunk costs associated with investment in developing decisions, including environmental and social costs, as well as sunk costs associated with environmental regulation and conservation. The Quasi Option Value, QOV, is used to derive decision rules that account for different levels of flexibility of land allocation possibilities. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Vincenzina Messina & Valentina Bosetti, 2003. "Uncertainty and Option Value in Land Allocation Problems," Annals of Operations Research, Springer, vol. 124(1), pages 165-181, November.
    • Handle: RePEc:spr:annopr:v:124:y:2003:i:1:p:165-181:10.1023/b:anor.0000004767.84402.b3
    DOI: 10.1023/B:ANOR.0000004767.84402.b3
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    Citations

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    Cited by:

    1. Changgang Ma & Min Zhou, 2018. "A GIS-Based Interval Fuzzy Linear Programming for Optimal Land Resource Allocation at a City Scale," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 135(1), pages 143-166, January.
    2. Bingkui Qiu & Shasha Lu & Min Zhou & Lu Zhang & Yu Deng & Ci Song & Zuo Zhang, 2015. "A Hybrid Inexact Optimization Method for Land-Use Allocation in Association with Environmental/Ecological Requirements at a Watershed Level," Sustainability, MDPI, vol. 7(4), pages 1-25, April.
    3. Yong Liu & Yajuan Yu & Huaicheng Guo & Pingjian Yang, 2009. "Optimal Land-Use Management for Surface Source Water Protection Under Uncertainty: A Case Study of Songhuaba Watershed (Southwestern China)," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 23(10), pages 2069-2083, August.
    4. Wen, Lanjiao & Chatalova, Lioudmila & Butsic, Van & Hu, Fox ZhiYong & Zhang, Anlu, 2020. "Capitalization of land development rights in rural China: A choice experiment on individuals’ preferences in peri-urban Shanghai," Land Use Policy, Elsevier, vol. 97(C).
    5. 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.
    6. Min Zhou & Shukui Tan & Lizao Tao & Xiangbo Zhu & Ghulam Akhmat, 2015. "An interval fuzzy land-use allocation model (IFLAM) for Beijing in association with environmental and ecological consideration under uncertainty," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(6), pages 2269-2290, November.
    7. Tsvetan G. Tsvetanov & Farhed A. Shah, 2012. "The Economics of Protection against Sea-Level Rise: An Application to Coastal Properties in Connecticut," Working Papers 10, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.

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