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Species Preservation and Biodiversity Value: A Real Options Approach

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  • Ilhem Kassar
  • Pierre Lasserre

Abstract

We evaluate biodiversity in a real options framework, when the resources in use are substitutable. We examine optimal conservation decisions given that a biodiversity loss is irreversible and that future use values are uncertain. While species substitutability is generally believed to reduce the value of diversity, we show that the flexibility associated with substitutability is a source of value. Marginal species value is decreasing in the number of species, but rising and convex in the value of the marginal species. As we show in the two-species homogenous model, increased volatility raises biodiversity value, and a positive correlation between species values both reduces the value of the pool of species and the value of biodiversity. The role played by the correlation between the value of a species and the value of other species, is reminiscent of the Beta of a financial asset. Just like an asset with a negative Beta derives additional value by providing insurance against fluctuations in the market portfolio, a species whose value tends to move in the opposite direction as the species in use derives additional value from its higher probability to be available for substitution if the value of the species in use diminishes. Nous étudions la biodiversité dans un cadre d'options réelles où les ressources sont substituables. Comment optimiser les décisions de conservation quand toute perte de biodiversité est irréversible et les valeurs futures incertaines? Nous montrons que la substituabilité, normalement considérée comme réduisant la valeur d'une espèce, est en fait source de valeur. La valeur marginale est décroissante dans Ie nombre d'espèces mais croissante et convexe dans la valeur de l'espèce marginale. Pour un modèle homogène à deux espèces, nous montrons également que la volatilité est un facteur d'augmentation de la valeur de la biodiversité, tandis que la corrélation réduit tant la valeur totale que la valeur marginale des espèces. Ce rôle de la corrélation entre valeur d'une espèce et valeur des autres espèces rappelle celui du Beta des actifs financiers. De même qu'un actif au Beta négatif tire de la valeur du fait qu'il permet de s'assurer contre les fluctuations du marché, une espèce dont la valeur tend à évoluer en sens inverse de celle de l'espèce en exploitation vaut plus du fait qu'elle a plus de chances de se substituer à cette dernière si celle-ci perd de la valeur.

Suggested Citation

  • Ilhem Kassar & Pierre Lasserre, 2002. "Species Preservation and Biodiversity Value: A Real Options Approach," CIRANO Working Papers 2002s-82, CIRANO.
  • Handle: RePEc:cir:cirwor:2002s-82
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    References listed on IDEAS

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    More about this item

    Keywords

    Real options; Option value; Biodiversity; Biological portfolio; Substitutability; Species; Assets; Marginal value; Options réelles; valeur d'option; portefeuille biologique; biodiversité; substituabilité; espèces; actifs; valeur marginale;

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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