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Emerging Environmental Problems, Irreversible Remedies, and Myopia in a Two Country Setup

Marcel Boyer (), Pierre Lasserre and Michel Moreaux

CIRANO Working Papers from CIRANO

Abstract: As development proceeds, the demand for environmental protection increases. We study optimal investment decision rules when protection investments are irreversible and indivisible. We show that myopia (focusing on one particular outlay without considering investments that are to come later in the sequence or are to be made by another jurisdiction) does not lead to errors in timing but greatly simplifies decision analysis. In a two country setup where each outlay benefits both countries, we also find that the equilibrium time sequence that arises when both countries must take turns to invest is also an equilibrium when the order is endogenous. Avec la croissance apparaissent de nouveaux besoins de protection de l'environnement. Nous étudions les règles d'investissement optimales lorsque les décisions sont irréversibles et les dépenses indivisibles. Une attitude myope consistant à ne tenir compte que des données immédiates du problème sans considérer les investissments futurs ou ceux d'autres juridictions simplifie énormément l'analyse et mène dans certains cas aux décisions optimales. Dans un modèle à deux pays où chaque pays bénéficie des investissements de l'autre, la chronologie d'investissement choisie lorsque les pays doivent investir tour à tour constitue également un équilibre lorsque l'ordre d'intervention est endogène.

Keywords: Real options; investment; environment; externality; myopia; Options réelles; investissement; environnement; externalité; myopie (search for similar items in EconPapers)
Date: 1997-10-01
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