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

Valentina Bosetti, J.M. Conrad and E. Messinat

Environmental & Resource Economics, 2004, vol. 29, issue 2, 219-229

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

Keywords: land allocation; quasi-option value; stochastic programming (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1023/B:EARE.0000044609.35994.ee

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