What's the Option?
Global warming, alterations of ecosystems, and sunk investmentsall imply irreversible changes with uncertain future costs and benefits. Twoconcepts measure how this combination of uncertainty and irreversibilitychanges the value of preserving an ecosystem or postponing an investment.First, the environmental and resource economics literature developed theArrow-Fisher-Hanemann-Henry quasi-option value. Second, the real optionsliterature developed the Dixit-Pindyck option value. This paper clarifiesthe precise differences between the two approaches in a simple two periodmodel. We explain that the quasi-option value captures the value of learningconditional on preservation, while the Dixit-Pindyck option value capturesthe net value of preservation under learning. We show how either of the twoconcepts alters the common net present value decision rule. We illustratesimilarities, differences, and the decision rules in two instructive examples.
|Date of creation:||01 Jan 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (510) 642-3345
Fax: (510) 643-8911
Web page: http://www.escholarship.org/repec/are_ucb/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
- Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
- Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
When requesting a correction, please mention this item's handle: RePEc:cdl:agrebk:qt41v56658. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If references are entirely missing, you can add them using this form.