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Testing Value vs Waiting Value in Environmental Decisions under Uncertainty

  • Attanasi, Giuseppe
  • Montesano, Aldo

This paper introduces the concept of the Testing Value into the analysis of environmental decisions under uncertainty and irreversibility. This value emerges in situations where the probability of receiving information concerning future economic benefits and costs of development depends on the level of development carried out. We show that when information may be acquired also exogenously, the Testing Value could push a risk-neutral decision maker to preserve more in the present and eventually in the future. The reason is that the Testing Value often leads to a only partial development of the environmental asset; on the contrary, the Waiting Value (a generalization of the quasi-option value à la Arrow and Fisher (1974)) always leads to corner solutions. Althoughits existence stems from endogenous information, surprisingly enough, the Testing Value is positively related to the probability of acquiring information exogenously.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-154.

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Date of creation: Apr 2010
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Handle: RePEc:tse:wpaper:22661
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