IDEAS home Printed from https://ideas.repec.org/p/ssb/dispap/390.html
   My bibliography  Save this paper

Are the Dixit-Pindyck and the Arrow-Fisher-Henry-Hanemann Option Values Equivalent?

Author

Listed:

Abstract

The relationship between the concept of option value in the literature on environmental preservation and the financial theory of option value is discussed by Fisher (2000), suggesting an equivalence between the two concepts. In a recent paper, Mensink and Requate (2004) argue that Fisher's claim is incorrect. In this paper we clarify Fisher's argument by drawing on the article by Hanemann (1989), whereby we find the conditions for the Arrow-Fisher-Henry-Hanemann (AFHH) and the Dixit-Pindyck (DP) option value concepts to coincide or not. The main point is that the AFHH option value is derived under the assumption that investment does not take place in the first period, neither in the closed-loop nor in the open-loop strategy, whereas the analysis of the DP option value is based on the assumption that investment in the open-loop strategy takes place in the first period.

Suggested Citation

  • 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.
    • Handle: RePEc:ssb:dispap:390
    as

    Download full text from publisher

    File URL: https://www.ssb.no/a/publikasjoner/pdf/DP/dp390.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    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. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    4. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    5. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    6. 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.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mensink, Paul & Requate, Till, 2005. "The Dixit-Pindyck and the Arrow-Fisher-Hanemann-Henry option values are not equivalent: a note on Fisher (2000)," Resource and Energy Economics, Elsevier, vol. 27(1), pages 83-88, January.
    2. Attanasi, Giuseppe Marco & Montesano, Aldo, 2010. "Testing Value vs Waiting Value in Environmental Decisions under Uncertainty," TSE Working Papers 10-154, Toulouse School of Economics (TSE).
    3. Fujii, Tomoki & Ishikawa, Ryuichiro, 2012. "Quasi-option value under strategic interactions," Resource and Energy Economics, Elsevier, vol. 34(1), pages 36-54.
    4. Charles Sims & Sarah E. Null, 2019. "Climate Forecasts and Flood Mitigation," Southern Economic Journal, John Wiley & Sons, vol. 85(4), pages 1083-1107, April.
    5. Krüger, Niclas A. & Svensson, Mikael, 2009. "The impact of real options on willingness to pay for mortality risk reductions," Journal of Health Economics, Elsevier, vol. 28(3), pages 563-569, May.
    6. Charles Sims & David Finnoff, 2016. "Opposing Irreversibilities and Tipping Point Uncertainty," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(4), pages 985-1022.
    7. Saltari, Enrico & Travaglini, Giuseppe, 2011. "The effects of environmental policies on the abatement investment decisions of a green firm," Resource and Energy Economics, Elsevier, vol. 33(3), pages 666-685, September.
    8. 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.
    9. 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.
    10. Traeger, Christian P., 2014. "On option values in environmental and resource economics," Resource and Energy Economics, Elsevier, vol. 37(C), pages 242-252.
    11. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    12. Abebayehu Tegene & Keith Wiebe & Betsey Kuhn, 1999. "Irreversible Investment Under Uncertainty: Conservation Easements and the Option to Develop Agricultural Land," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 203-219, May.
    13. Justus Wesseler, 2002. "The Option Value of Scientific Uncertainty on Pest - Resistance Development of Transgenic Crops," Others 0207005, University Library of Munich, Germany.
    14. de la Croix, David & Pommeret, Aude, 2021. "Childbearing postponement, its option value, and the biological clock," Journal of Economic Theory, Elsevier, vol. 193(C).
    15. Lin, Tyrone T. & Ko, Chuan-Chuan & Yeh, Hsin-Ni, 2007. "Applying real options in investment decisions relating to environmental pollution," Energy Policy, Elsevier, vol. 35(4), pages 2426-2432, April.
    16. Jérôme Bourdieu & Benoît Coeuré & Béatrice Sédillot, 1997. "Investissement, incertitude et irréversibilité. Quelques développements récents de la théorie de l'investissement," Revue Économique, Programme National Persée, vol. 48(1), pages 23-53.
    17. Chady Jabbour & Anis Hoayek & Jean-Michel Salles, 2022. "Formalizing a Two-Step Decision-Making Process in Land Use: Evidence from Controlling Forest Clearcutting Using Spatial Information," Land, MDPI, vol. 12(1), pages 1-17, December.
    18. Alaa El-Shazly, 2009. "Investment Under Tax Policy Uncertainty: A Neoclassical Approach," Public Finance Review, , vol. 37(6), pages 732-749, November.
    19. Francois Salanie & Nicolas Treich, 2009. "Option Value and Flexibility: A General Theorem with Applications," LERNA Working Papers 09.12.288, LERNA, University of Toulouse.
    20. van den Bergh, Jeroen C.J.M., 2008. "Optimal diversity: Increasing returns versus recombinant innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 565-580, December.

    More about this item

    Keywords

    Option value; Uncertainty; Information; Irreversibility; Environment;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssb:dispap:390. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: L Maasø (email available below). General contact details of provider: https://edirc.repec.org/data/ssbgvno.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.