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The Impact of Real Options on Willingness to Pay for Investments in Road Safety

  • Krüger, Niclas A

    ()

    (Department of Business, Economics, Statistics and Informatics)

  • Svensson, Mikael

    ()

    (Department of Business, Economics, Statistics and Informatics)

Abstract: Public investments are dynamic in nature, and decision making must account for the uncertainty, irreversibility and potential for future learning. In this paper we adapt the theory for investment under uncertainty for a public referendum setting and perform the first empirical test to show that estimates of the value of safety (VSL) from stated preference surveys are highly dependent on the inclusion of the option value. Our results indicate an option value of a major economic magnitude. This implies that previously reported VSL estimates are exaggerated.

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File URL: https://www.oru.se/globalassets/oru-sv/institutioner/hh/workingpapers/workingpapers2007/wp-9-2007.pdf
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Paper provided by Örebro University, School of Business in its series Working Papers with number 2007:9.

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Length: 23 pages
Date of creation: 07 Nov 2007
Date of revision: 08 Feb 2008
Publication status: Published in Journal of Health Economics, 2009, pages 563-569.
Handle: RePEc:hhs:oruesi:2007_009
Contact details of provider: Postal:
Örebro University School of Business, SE - 701 82 ÖREBRO, Sweden

Phone: 019-30 30 00
Fax: 019-33 25 46
Web page: http://www.oru.se/Institutioner/Handelshogskolan-vid-Orebro-universitet/

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  1. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Jinhua Zhao & Catherine L. Kling, 2004. "Willingness to Pay, Compensating Variation, and the Cost of Commitment," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 503-517, July.
  3. W. Kip Viscusi & Joseph E. Aldy, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," NBER Working Papers 9487, National Bureau of Economic Research, Inc.
  4. Andersson, Henrik & Svensson, Mikael, 2006. "Cognitive Ability and Scale Bias in the Contingent Valuation Method," Working Papers 2006:2, Swedish National Road & Transport Research Institute (VTI).
  5. Johannesson, Magnus & Johansson, Per-Olov & Löfgren, Karl-Gustaf, 1997. "On the Value of Changes in Life Expectancy: Blips versus Parametric Changes," SSE/EFI Working Paper Series in Economics and Finance 152, Stockholm School of Economics.
  6. repec:reg:rpubli:282 is not listed on IDEAS
  7. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  8. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  9. Dinky Daruvala, 2007. "Gender, risk and stereotypes," Journal of Risk and Uncertainty, Springer, vol. 35(3), pages 265-283, December.
  10. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
  11. 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.
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