Are the Dixit-Pindyck and the Arrow-Fisher-Henry-Hanemann option values equivalent?
Working paper
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http://hdl.handle.net/11250/180425Utgivelsesdato
2004Metadata
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- Discussion Papers [1003]
Sammendrag
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.
Keywords: Option value, Uncertainty, Information, Irreversibility, Environment