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Evaluating Environmental Investments: A Real Options Approach

Author

Listed:
  • Gonzalo Cortazar

    (Departamento Ingeniería Industrial y de Sistemas, Pontificia Universidad Católica de Chile)

  • Eduardo S. Schwartz

    (Anderson Graduate School of Management, University of California at Los Angeles, Los Angeles, California 90095-1481)

  • Marcelo Salinas

    (Departamento Ingeniería Industrial y de Sistemas, Pontificia Universidad Católica de Chile)

Abstract

The paper presents a model that determines when (at which output price level) it is optimum for a firm to invest in environmental technologies and which are the main parameters that affect this decision. Our analysis shows that firms require high output price levels to be induced to invest in environmental technologies, because they optimally would not want to commit to a heavy irreversible investment that could turn out to be unprofitable in the event of a price fall. A comparative static analysis predicts that firms in industries with high output price volatility would be more reluctant to invest in environmental protection technologies and would be more willing to operate at low output levels (thus attaining low emission levels). Increases in the interest rate would also reduce optimal environmental investment levels.

Suggested Citation

  • Gonzalo Cortazar & Eduardo S. Schwartz & Marcelo Salinas, 1998. "Evaluating Environmental Investments: A Real Options Approach," Management Science, INFORMS, vol. 44(8), pages 1059-1070, August.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:8:p:1059-1070
    DOI: 10.1287/mnsc.44.8.1059
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    References listed on IDEAS

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