Evaluating Environmental Investments: A Real Options Approach

Gonzalo Cortazar, Eduardo S. Schwartz and Marcelo Salinas
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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

Management Science, 1998, vol. 44, issue 8, 1059-1070

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.

Keywords: Real Options; Environmental Economics; Capital Budgeting; Natural Resources (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:44:y:1998:i:8:p:1059-1070

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