Option Value and Flexibility: A General Theorem with Applications
What is the effect of future information on today's actions? The answer may help understand, or justify, low investment in the presence of costs, a preference for holding liquid money, self-insurance or precautionary savings motives, environmental preservation and global warming abatement policies. Within a three-period model, Epstein (1980) showed that the effect of future information depends on a condition on an indirect value function. We provide the necessary and sufficient condition on the model's primitives. Furthermore, we derive a generic ambiguity result, and characterize all model specifications for which the question can be answered without ambiguity. These specifications include all classical models discussed in the literature. The paper also discusses the interpretation of the concept of flexibility in this literature.
(This abstract was borrowed from another version of this item.)
|Date of creation:||May 2009|
|Contact details of provider:|| Postal: manufacture des Tabacs, 21 allée de brienne, 31200 Toulouse|
Phone: (+33) 5 61 12 86 23
Web page: http://www.toulouse.inra.fr/lerna/
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.:
- Eeckhoudt, Louis & Gollier, Christian & Treich, Nicolas, 2005.
"Optimal consumption and the timing of the resolution of uncertainty,"
European Economic Review,
Elsevier, vol. 49(3), pages 761-773, April.
- EECKHOUDT, Louis & GOLLIER, Christian & TREICH, Nicolas, "undated". "Optimal consumption and the timing of the resolution of uncertainty," CORE Discussion Papers RP 1792, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- L. Eeckhoudt & C. Gollier & N. Treich, 2005. "Optimal consumption and the timing of the resolution of uncertainty," Post-Print hal-00292426, HAL.
- Maler, Karl-Goran & Fisher, Anthony, 2006. "Environment, Uncertainty, and Option Values," Handbook of Environmental Economics,in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 13, pages 571-620 Elsevier.
- Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
- Carolyn Kousky & Erzo Luttmer & Richard Zeckhauser, 2006. "Private investment and government protection," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 73-100, September.
- Kousky, Carolyn & Luttmer, Erzo F. P. & Zeckhauser, Richard, 2006. "Private Investment and Government Protection," Working Paper Series rwp06-017, Harvard University, John F. Kennedy School of Government.
- Carolyn Kousky & Erzo F.P. Luttmer & Richard J. Zeckhauser, 2006. "Private Investment and Government Protection," NBER Working Papers 12255, National Bureau of Economic Research, Inc.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Baker, Erin, 2005. "Uncertainty and learning in a strategic environment: global climate change," Resource and Energy Economics, Elsevier, vol. 27(1), pages 19-40, January.
- Fisher, Anthony C. & Hanemann, W. Michael, 1987. "Quasi-option value: Some misconceptions dispelled," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 183-190, June.
- Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
- Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
- Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
- Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-283, June.
- Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 13-32.
- Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
- 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.
- Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December. Full references (including those not matched with items on IDEAS)