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Christian-Albrechts-Universität zu Kiel

Institut für Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2003-09




Paul Mensink,Till Requate




The Dixit-Pindyck an the Arrow-Fisher-Hanemann-Henry option values are not equivalent
Abstract Fisher [2000, this journal] offers a unifying framework for two concepts of (quasi-) option value suggested by Arrow, Fisher, Hanemann, and Henry (AFHH) on the one hand, and by Dixit and Pindyck (DP) on the other, and claims these two concepts to be equivalent. We show that this claim is not correct and point out the flaws in Fisher's proof. We further suggest a decomposition of the DP option value into two components, one of which corresponds exactly to the AFHH option value which captures the value of obtaining new information, and a second one which captures the postponement value irrespective of uncertainty.


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