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The Option Value of Scientific Uncertainty on Pest - Resistance Development of Transgenic Crops

  • Justus Wesseler

In this paper the option value of waiting under scientific uncertainty will be derived using the difference between the geometric Brownian motion and the mean reverting process by applying contingent claim analysis. The results will be compared with those generated by either using a geometric Brownian motion or a mean-reverting process only. An example based on the decision problem whether or not to release herbicide tolerant rape seed in the EU will be used to illustrate the differences. The paper contributes to the suggestion made by biologists to further analyze the sensitivity of the results using the real option approach, provides insights about the magnitude of error that can be made by choosing the wrong process, provides a solution to the problem and highlights the implication for the decision of whether or not to release transgenic crops. The results show that scientific uncertainty is less important than one would expect at first hand.

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Paper provided by EconWPA in its series Others with number 0206001.

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Length: 15 pages
Date of creation: 14 Jun 2002
Date of revision:
Handle: RePEc:wpa:wuwpot:0206001
Note: Type of Document - winword; prepared on windows 98; pages: 15
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Merton, Robert C., 1997. "Applications of Option-Pricing Theory: Twenty-Five Years Later," Nobel Prize in Economics documents 1997-1, Nobel Prize Committee.
  2. 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.
  3. Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May.
  4. 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.
  5. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  6. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
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