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The Value of Flexibility: Preservation, Remediation, or Development for Ginostra?

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  • V. Bosetti
  • J.M. Conrad
  • E. Messinat

Abstract

We are concerned with land allocation andinvestment decisions when dealing withpartially degraded areas that might be (1)remediated and returned to a more natural state;or (2) irreversibly developed. This type ofproblem seems particularly relevant in Europewhere the issue of wilderness conservation isof less concern than the remediation oflandscapes which have been altered by previouseconomic activities. Traditional expectedpresent value analysis will fail to capture thevalue of investments that might be undertakensequentially or when certain investments areirreversible. We show how to determine, withina discrete-time, stochastic model, the optimaladaptive development strategy and how tocalculate the option value of flexibility. Thetheoretical model is then applied to Ginostra,a town on Stromboli, an island off the southerncoast of Italy. Copyright Kluwer Academic Publishers 2004

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  • V. Bosetti & J.M. Conrad & E. Messinat, 2004. "The Value of Flexibility: Preservation, Remediation, or Development for Ginostra?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 29(2), pages 219-229, October.
    • Handle: RePEc:kap:enreec:v:29:y:2004:i:2:p:219-229
    DOI: 10.1023/B:EARE.0000044609.35994.ee
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    References listed on IDEAS

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    Cited by:

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    2. Jens Abildtrup & Jacques-Alexandre Laye & Maximilien Laye & Anne Stenger, 2012. "Irreversibility and Uncertainty in Multifunctional Forest Management Allocation," Post-Print hal-01072290, HAL.
    3. Tsvetan G. Tsvetanov & Farhed A. Shah, 2012. "The Economics of Protection against Sea-Level Rise: An Application to Coastal Properties in Connecticut," Working Papers 10, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    4. Detert, Neal & Kotani, Koji, 2013. "Real options approach to renewable energy investments in Mongolia," Energy Policy, Elsevier, vol. 56(C), pages 136-150.

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