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The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent

Author

Listed:
  • Mensink, Paul
  • Requate, Till

Abstract

Fisher [2000, this journal] offers a unifying framework for two concepts of (quasi-) option value suggested by Arrow, Fisher, Hanemann, and Henry (AFHH) on the one hand, and by Dixit and Pindyck (DP) on the other, and claims these two concepts to be equivalent. We show that this claim is not correct and point out the flaws in Fisher's proof. We further suggest a decomposition of the DP option value into two components, one of which corresponds exactly to the AFHH option value which captures the value of obtaining new information, and a second one which captures the postponement value irrespective of uncertainty.

Suggested Citation

  • Mensink, Paul & Requate, Till, 2003. "The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent," Economics Working Papers 2003-09, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:853
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    Cited by:

    1. Mensink, Paul, 2004. "A comment on "An arbitrage-free approach to quasi-option value" by Coggins and Ramezani," Economics Working Papers 2004-06, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Iulie Aslaksen & Terje Synnestvedt, 2004. "Are the Dixit-Pindyck and the Arrow-Fisher-Henry-Hanemann Option Values Equivalent?," Discussion Papers 390, Statistics Norway, Research Department.

    More about this item

    Keywords

    option value; quasi option value; decision under uncertainty; irreversible investment;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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