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

Iulie Aslaksen and Terje Synnestvedt ()
Additional contact information
Terje Synnestvedt: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

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 (search for similar items in EconPapers)
JEL-codes: D81 Q20 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.ssb.no/a/publikasjoner/pdf/DP/dp390.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:390

Access Statistics for this paper

More papers in Discussion Papers from Statistics Norway, Research Department P.O.Box 8131 Dep, N-0033 Oslo, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by L Maasø ().