measuring and assessing capacity utilization in the manufacturing sectors of nine oecd countries following a tradition established by cassels klein and hickman we employ the economic theory of cost and production and define economic capacity output as that output at which short and long run average total cost curves are tangent to one another capacity utilization cu rates are then computed as the ratio of actual to capacity output we implement this framework empirically by specifying and estimating a translog variable cost function for the manufacturing sectors of nine oecd countries we find that by the end of the historical sample the early 1980s pervasive and chronic excess capacity exists while the average cost consequence of excess capacity was relatively modest in the 1960s the burden increased considerably after opec i and after opec ii the premium was as large as 15 of average total costs we also find that electricity and fuel price increases had small impacts on capacity output relative to that from labor or capital finally we adjust conventional measures of multifactor productivity growth for changes in cu and find that the adjusted growth is larger after 1973 than that based on traditional procedures

the tree cutting problem in a stochastic environment the case of age dependent growth abstract harvest policies are derived for growing biological assets e g forests livestock subject to stochastic age dependent growth and price uncertainty the task posed is analyzed as a continuous time optimal stopping problem for diffusion processes both single and ongoing rotation problems are considered qualitative comparative static and numerical results are provided

optimum management and environmental protection in the aquaculture industry abstract the sustainability of the aquaculture industry has recently been the object of social and scientific debate due to the contamination caused by the culture to the surrounding environment as a contribution to the debate this paper analyses the effect of adopting a pigovian tax to internalise the environmental costs on the optimal management of farms to do so we make use of dynamic stochastic models of fish growth and contamination diffusion farms can also implement some measures to abate pollution which are divided into two types those applied continuously managerial measures and those once in a culture cycle structural measures the results reveal that the tax imposition lowers the optimum size in the farm the type of abatement strategy plays a central role in the determination of the optimum harvest size a need for caution in internalisation policies is emphasized as negative consequences could arise in certain cases putting the farms survival at risk

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

carbon subsidies taxes and optimal forest management we consider the effect of carbon credit payment schemes on forest owners land use and harvest decisions we study two possible credit allocation regimes one where credits are allocated according to the actual amount of carbon sequestered by the trees on a piece of land and another where credits are allocated according to the long run potential to sequester carbon on the land using a real options model with uncertain future timber prices we examine the effect on the timing of harvests and the replanting abandonment decision we show that both schemes discourage deforestation compensating growers for actual carbon sequestration leads to longer rotation periods between harvests while basing compensation only on the long run potential level of sequestration induces shorter rotation periods the former scheme leads to greater benefits of carbon sequestration at lower cost than the latter scheme although inducing moderate levels of sequestration is expensive under both schemes the cost falls dramatically when the level of payments climbs above some threshold indeed providing the payments are sufficiently generous carbon credit payment schemes offer an effective means of increasing carbon sequestration

utility profits fiscal illusion and local public expenditures the main purpose of this paper has been to examine theoretically and empirically the effects of internal subsidization by municipal utilities on local public expenditures and tax burdens the hypothesis was deduced that internal subsidization severs the link between public benefits received and taxes paid creating a fiscal illusion that induces consumer taxpayers to underestimate the actual cost of government this in turn would lead to larger expenditure levels than would otherwise be forthcoming this hypothesis was tested statistically with a sample of fifty two municipalities in the state of new york which use utility profits to subsidize the general fund and sixty four other municipalities which do not a reduced form public expenditure model was estimated which included a dummy variable to check for any differences in expenditures ceteris paribus between the subsidy cities and others it was found that subsidy cities had larger expenditure levels all other things equal which adds support for the main hypothesis it was also found that while it is possible that utility profits may be substituted for other local revenue sources in the sample of new york municipalities studied internal subsidization is likely to have stimulated expenditures leading to an increase in local tax collections this result adds further support for the main hypothesis

real options approach to renewable energy investments in mongolia developing nations are seeking alternative energy for electricity and one attractive alternative is renewable energy this research analyzes changing investment environment for renewable energy with real options approach and explores its potential in developing economies through studying the case of mongolia under coal price uncertainty to evaluate comparative attractiveness of either continuing to use coal based infrastructures or switching to renewable energy we formulate social revenue functions for the two environments assuming that renewable energy has lower external costs and coal prices follow geometric brownian motion gbm or geometric mean reverting gmr processes we find the optimal trigger coal prices for switching technologies with some scenarios in electricity price and externality characterize when renewable energy investments become attractive in contrast to conventional wisdom we identify some situations where the value of having more decision opportunities does not exceed that of a now or never decision for switching technologies and welfare losses are incurred the optimal trigger prices are higher in gbm than in gmr and our result raises the possible risks for waiting to switch energy to avoid welfare losses in mongolia the government should increase electricity prices or switch to renewable energy earlier especially when people pay more for the removal of externalities

forest valuation under the new zealand emissions trading scheme a real options binomial tree with stochastic carbon and timber prices under the new zealand emissions trading scheme forests planted on or after january 1 1990 earn carbon credits these credits have to be repaid when the forest is harvested this paper analyses the effects of this scheme on the value of bareland on which radiata pine is to be planted a real options method is developed and applied assuming stochastic carbon and timber prices we find that land value increases by about 73 with the optimal rotation age substantially lengthened the derived optimal harvest price thresholds are useful in deciding whether to harvest or to wait jel q23 q28

valuing flexibility the case of an integrated gasification combined cycle power plant abstract in this paper we analyze the choice between two technologies for producing electricity in particular the firm has to decide whether and when to invest either in a natural gas combined cycle ngcc power plant or in an integrated gasification combined cycle igcc power plant which may burn either coal or natural gas instead of assuming that fuel prices follow standard geometric brownian motions here they are assumed to show mean reversion specifically to follow an inhomogeneous geometric brownian motion first we consider the opportunity to invest in a ngcc power plant we derive the optimal investment rule as a function of natural gas price and the remaining life of the right to invest in addition the analytical solution for a perpetual option to invest is obtained then we turn to the igcc power plant we analyse the valuation of an operating plant when there are switching costs between modes of operation and the choice of the best operation mode this serves as an input to evaluate the option to invest in this plant finally we derive the value of an opportunity to invest either in a ngcc or igcc power plant i e to choose between an inflexible and a flexible technology respectively depending on the opportunity s time to maturity we derive the pairs of coal and gas prices for which it is optimal to invest in ngcc in igcc or simply not to invest numerical computations involve the use of one and two dimensional binomial lattices that support a mean reverting process for coal and gas prices basic parameter values are taken from an actual igcc power plant currently in operation sensitivity of some results with respect to the underlying stochastic process for fuel price is also checked

the value of adaption climate change and timberland management abstract adaptation to exogenous change occurs on both intensive and extensive margins whether and how one accounts for human adaptation directly affects estimates of the economic consequences of environmental change estimates that are both critical in informing policy decisions and notoriously difficult to value this paper introduces and applies an analytical framework for placing an economic value on adaptation we explore the issue first in a stylized model that facilitates making concrete generalizations about the kinds of adaptations that generate high or low economic value we then test the soundness of our insights by incorporating learning and adaptive decision making into a structural dynamic forestry model where climate change is imposed exogenously and agents respond optimally using downscaled climate projections integrated with site and species specific timber productivity data we estimate the economic value of adaptation to climate change within the california timber industry we find on the intensive margin changing the rotation intervals will yield a low value of adaptation but on the extensive margin replanting more suitable tree species can yield significant value

on estimating the option value of preserving a wilderness area in this paper option pricing theory is used to analyse whether or not to preserve a wilderness area a numerical approach is demonstrated that can be applied to any generalized stochastic process the impact of assuming that amenity value follows a logistic process rather than geometric brownian motion is considered the calculation of critical levels for amenity value necessary to justify preserving a wilderness area such as the killarney provincial park in ontario or the headwaters forest in california is demonstrated the impact of changing the assumed growth and volatility of amenity value is also examined jel classifcation d81 q26 ce memoire utilise la theorie de la tarification d une option pour analyser si on doit preserver un espace naturel on utilise une approche numerique qui peut etre appliquee a tout processus stochastique generalise on examine l impact de possibilites que le profil de la valeur de la ressource dans la temps suive un processus logistique plutot qu un pattern geometrique de type brownien le texte montre le calcul des niveaux critiques de la valeur de la ressource qui seraient necessaires pour justifier la preservation d une espace naturel comme le parc provincial killarney en ontario ou les forets headwaters en californie l impact de postulats differents quant a la croissance et a la volatilite de la valeur de la ressource est examine

on the faustmann solution to the forest management problem abstract this paper is concerned with optimal solutions to the forest management problem when future utilities are undiscounted by examining asymptotic properties of such solutions we find that i if the utility function is linear then the faustmann periodic solution is optimal ii if the utility function is increasing and strictly concave an optimal solution converges to the maximum sustained yield solution which we characterize as a golden rule these results may be viewed as a possible resolution to the debate in forestry economics about what constitutes an optimal policy in forest management

quasi fixed inputs in u s and japanese manufacturing a generalized leontief restricted cost function approach in this paper a generalized leontief variable cost function is develope d which permits analytical derivation of steady state levels of quasi fixed inputs and capacity output and does not require specification of a numeraire input this framework is then used to evaluate the fa ctor demand patterns of japanese and u s manufacturing based on bot h one quasi fixed capital input and two quasi fixed capital and la bor input specifications and both static and dynamic optimization t he findings provide evidence of considerable flexibility of demand re sponses in japan which may have contributed to japan s relatively st rong economic performance in the volatile 1970s copyright 1988 by mit press

railway de regulation a european efficiency comparison many european countries have sought to increase the efficiency of national railroad companies through a range of reforms including the separation of infrastructure and operations the creation of independent regulatory institutions and the provision of access to the network to third parties this document reports on a study undertaken to investigate a new world bank panel dataset that covers many european union eu countries over a period of 20 years the authors used this dataset to estimate the effects of reforms on railroad efficiency they compare the passenger traffic efficiency of national railroad companies by means of a production frontier model and then evaluate the effects of reforms on efficiency the data showed that reforms have efficiency increasing effects but the effect of reforms depends on sequencing the introduction of multiple reforms in a package has at best neutral effects but sequential reforms improve efficiency the authors also describe how they used the lisrel technique to test their data and show that their results are robust against potential problems of endogeneity

airline deregulation the cost pieces of the puzzle this paper analyzes cost changes in the u s airline industry in the pre and postderegulation era using a panel data set of airlines specifically it seeks to disentangle cost changes attributable to technical change economies of scale and density and input prices the authors estimate a purely general index of industry technical change and in turn analyze its determinants despite the slowing of productivity growth in the 1980s deregulation does appear to have stimulated technical change due to more efficient route structures copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a real options model for renewable energy investment with application to solar photovoltaic power generation in china this paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as co2 price non renewable energy cost investment cost and market price of electricity a phase out mechanism is built into the model to reflect the long term changes of subsidy policy we apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in china our empirical results show that the current investment environment in china may not be able to attract immediate investment while the development of carbon market helps advance the optimal investment time a sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity subsidy level market price of electricity co2 price and investment cost it is found that the high investment cost and the volatility of electricity and co2 prices are not conducive to attract immediate investment instead increasing the level of subsidy promoting technological progress and maintaining the stability of market are useful to stimulate investment

the economics of quality this paper develops a model of quality determination where the usual competitive equilibrium conditions hold the explicit form of quality considered is the wait required to obtain the product the analysis however is much more general being valid for products that have a characteristic z such that 1 demand is a function of price and a measure defined on z 2 costs are a function of output and the measure on z and 3 z is a function of output and capacity expected profit maximizing firms in equilibrium look like monopolistic competitors once constant quality is imposed however the perfect competitive results obtain

options uncertainty and sunk costs an empirical analysis of land use change abstract in a real option model of land conversion incorporating return uncertainty and sunk costs optimal conversion thresholds are significantly higher than those from expected net present value models not accounting for these factors empirical tests of conversion from agriculture to forest suggest that landowners value the option to convert when making conversion decisions higher uncertainty in returns to all potential uses and lower correlation between shocks to agricultural and forest returns decreases the likelihood of conversion estimates indicate a significant impact on conversion decisions with approximations of option values ranging from 7 to 81 of the expected value of the land asset

estimating the influence of u s ethanol policy on plant investment decisions a real options analysis with two stochastic variables abstract u s ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms the implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components as well as the correlation between them the effects of policy affecting plant revenues dominate the effects of those policies affecting production costs in the absence of these policies much of the recent expansionary periods would have not existed and market conditions in the late 1990s would have led to some plant closures we also show that regardless of plant size u s ethanol policy has narrowed the distance between the optimal entry and exit curves implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise

the optimal production of an exhaustible resource when price is exogenous and stochastic this paper examines the optimal production of a resource such as oil when its price is determined exogenously e g by a cartel such as opec and is subject to stochastic fluctuations away from an expected growth path we first examine the dependence of production on extraction cost and show that the conventional exponential decline curve is indeed optimal if marginal cost is constant with respect to the rate of extraction but is a hyperbolic function of the reserve level we next show that uncertainty about future price affects the optimal production rate in two ways first if marginal cost is a convex concave function of the rate of production stochastic fluctuations in price raise lower average cost over time so that there is an incentive to speed up slow down production second the option value of the reserve i e the ability to withhold production indefinitely and never incur the cost of extraction provides an incentive to slow down the rate of production

municipal utilities and local public finance a simultaneous model our results confirm the existence of a positive direct effect of cross subsidies from municipally owned water utilities on city spending while the results are consistent with the hypothesis that internal subsidization creates a fiscal illusion they are also consistent with vote maximizing behavior that is the demand for cross subsidies is found to depend on factors that reflect the city s fiscal position including its spending level in the absence of a contribution the results of the logit estimation suggest that annual contributions are discretionary and explained primarily by a city s fiscal health our results also confirm the existence of a simultaneous relationship between municipal spending and utility contributions and the need for a simultaneous estimation technique this bias affects all prior studies of the interaction between utility revenue contributions and local public finance variables and future studies must be aware of the simultaneous nature of the underlying relationship

asset retirement with infinitely repeated alternative replacements harvest age and species choice in forestry abstract at what age should productive assets be retired how should replacements be chosen when they differ in their uncertain ability to generate future incomes as a particular version of that problem we study the tree harvesting decision with two possible replacement species whose values as timber are stochastic and whose growth functions are deterministic in the single rotation wicksell problem starting with a bare piece of land an empty shop it is optimal to choose and plant one species immediately if its current value is sufficiently high relative to that of the other species the alternative equipment however if the species are insufficiently price differentiated it is preferable to leave the land vacant the shop empty despite the opportunity cost of doing so in the repeated version of the problem it is never optimal to leave the land bare provided the cost of replacement is null furthermore the optimal harvest tree retirement age not only depends on the price and current productivity of the trees in place but also on the price and productivity of the other species because it may replace the current one the harvest age reaches a peak at some critical threshold of the relative price that signals the necessity to switch to the alternative species indeed this is when the opportunity cost of choosing one alternative replacement over the other is the highest the land value and also the value of the firm is similar to an american option with free boundary infinite expiry period and endogenous payoff the paper highlights the opportunity cost of alternative replacement options and the central role of their volatility in both asset retirement and replacement choice decisions all results are derived analytically a numerical treatment by the penalty method completes the resolution

wicksellian theory of forest rotation under interest rate variability abstract we apply the wicksellian single rotation framework to cover the unexplored case of variable and stochastic interest rate we provide a mathematical characterization of the two dimensional optimal stopping problem and show in the presence of amenity valuation that increased interest rate volatility lengthens the optimal rotation period and increases the value of the optimal policy by modelling the interest rate as a mean reverting process and forest value as a geometric brownian motion and abstracting from amenity valuation we present an explicit solution for the problem numerical illustrations indicate that interest rate volatility has a significant and non linear impact on optimal rotation

structural versus reduced form estimation of optimal stopping problems in this paper i examine several statistical interpretive and policy implications of reduced form probit or logit estimation of optimal stopping problems the discussion proceeds in the context of an examination of the timber harvest decision of nonindustrial private forest nipf owners for a large class of optimal stopping problems a reduced form model which closely approximates the statistical performance of its structural counterpart is readily found still failure to properly interpret the relationship between the reduced form model and the underlying optimal stopping problem invites flawed econometric analysis and inappropriate interpretation of reduced form coefficients

optimal design of subsidy to stimulate renewable energy investments the case of china this paper proposes a real options model for estimating the optimal subsidy for renewable energy power generation project by using stochastic process to describe the market price of electricity co2 price and investment cost two indicators i e project value and threshold value are used to derive the optimal subsidy the least squares monte carlo simulation method is used to solve the model the proposed model is used to empirically evaluate the optimal level of subsidy for solar photovoltaic power generation in china the results show that carbon emission trading scheme helps reduce subsidy unit generating capacity market price of electricity co2 price and the volatility of investment cost are negatively related with subsidy whereas investment cost and the volatility of electricity price and co2 price are positively related with subsidy it is suggested that chinese governments take some measures e g promoting technological progress establishing a nationwide carbon emission trading market promoting the competition in renewable energy industry as well as maintaining the stability of co2 price and electricity price to reduce the required subsidy

a stochastic analysis of the tree paradigm abstract the tree paradigm which is a problem in optimal stopping has important ramifications for human capital acquisition search behavior firm entry and in the theory of renewable resources our paper extends previous work in the stochastic literature on several fronts we exhibit a tractable solution to the rotation problem for the stochastic model analyze the effects of inputs which control the growth process and illustrate our results with a multi stage learning problem

taxation and rotation age under stochastic forest stand value abstract the paper uses both the single rotation and ongoing rotation framework to study the impact of yield tax lump sum tax and tax on interest rate earnings on the privately optimal rotation period when forest stand value is stochastic and forest owners are risk averse or risk neutral under risk aversion the optimal harvesting threshold is lower and therefore the expected rotation period shorter than under risk neutrality both in the single and ongoing rotation cases whether the forest owner is risk averse or risk neutral a higher yield tax a higher lump sum tax or a higher tax on interest rate earnings raise the optimal harvesting threshold numerical results indicate that the optimal harvesting threshold increases less rapidly under risk aversion than under risk neutrality with an increase in either a yield tax or the volatility of forest stand value

allocating resources in an uncertain world water management and endangered species instream flows may be essential in protecting aquatic species that are threatened or endangered an economic model of the optimal allocation of water under pure uncertainty is developed with particular attention paid to the situation when a species characterized by critical depensation is affected by instream flows we adopt the notion of pure uncertainty that frank knight and daniel ellsberg intended which applies when decision makers cannot reduce their uncertainty to a unique probability distribution following recent work by hansen sargent and others we employ robust control as a way to deal with this problem copyright 2008 oxford university press

good timing the economics of optimal stopping abstract this paper presents an economic interpretation of the optimal stopping of perpetual project opportunities under both certainty and uncertainty prior to stopping the expected rate of return from delay exceeds the rate of interest the expected rate of return from delay is the sum of the expected rate of change in project value and the expected rate of change in the option premium associated with waiting at stopping the expected rate of return from delay has fallen to the rate of interest viewing stopping in this way unifies the theoretical and practical insights of the theory of stopping under certainty and uncertainty

on solving the multirotational timber harvesting problem with stochastic prices a linear complementarity formulation this article develops a two factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous hamilton jacobi bellman methodology the harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method this approach is contrasted with the markov decision process models commonly used in the literature the model is used to estimate the value of a representative stand in ontario s boreal forest both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date

regime switching in stochastic models of commodity prices an application to an optimal tree harvesting problem abstract this paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model prices of lumber derivatives are used to calibrate a regime switching model with each of two regimes characterized by a different mean reverting process a single regime mean reverting process is also calibrated the value of a representative stand of trees and optimal harvesting prices are determined by specifying a hamilton jacobi bellman variational inequality which is solved for both pricing models using a implicit finite difference approach the regime switching model is found to more closely match the behavior of futures prices than the single regime model in addition analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models

patent pools and cross licensing in the shadow of patent litigation this paper develops a framework to analyze the incentives to form a patent pool or engage in cross licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable it analyzes the private incentives to litigate and compares them with the social incentives it shows that pooling arrangements can have the effect of sheltering invalid patents from challenges this result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each other s patents if litigation costs are not too large

the planting real option in cash rent valuation after entering into a farmland cash rent contract in the fall a tenant farmer has flexibility over the spring crop choice and the input application level failure to account for these options will bias estimates of what farmers should pay to rent land applying monte carlo simulation methods this study investigates the option values for these choices a multivariate gaussian copula mgc is employed to account for dependence among yields and prices results show that the average cash rent valuation for the real option approach is 33 6 higher than that for the conventional net present value npv method in which the input intensity option is 0 9 crop planting sequence is shown to impact the real option value

economic competition and political competition an empirical note this paper has examined the proposition that more concentrated or consolidated metropolitan areas will produce public goods less efficiently than if there were a greater degree of interjurisdictional competition the empirical evidence garnered in section 3 suggests that interjurisdictional competition does tend to reduce the cost of providing local public services and consequently local government expenditure levels

valuation and management of fishing resources under price uncertainty the traditional expected net present value methods cannot properly capture the management flexibility and strategic value aspects of a fishery and may understate its value instead this paper develops a real options model to conceptualize and evaluate fishery exploitation flexibility specifically general models to value the opportunity to either exploit or invest in a fishery are presented they suffice to determine not only these values but also the optimal policy for opening closing delaying and setting its harvest rate the sustainable case in which the harvest rate equals the natural net growth function is also considered concerning the exploitation decision it is found that as could be expected the higher the resource price the higher the value of this opportunity in both models general and sustainable however the resource stock affects both models differently as to the investment opportunity its value is always lower than the exploitation opportunity because of investment costs finally numerical simulations are run in order to illustrate the nature of the solution sensitivity analysis concerning the influence of the tax rate convenience yield risk free interest rate and price volatility on the value of the fishery is also reported

investment flexibility as a barrier to entry abstract this paper presents a model of investment in a duopoly with firms that choose the scale and timing of investment decision making flexibility and the costs saved by investing in large steps rather than sequences of small steps determine an incumbent s ability to deter entry by a potential competitor entry occurs when these cost savings are very small or very large because the effect of increased industry capacity on the incumbent s assets in place is the same regardless of which firm invests in intermediate cases the incumbent is able to deter entry by making a smaller earlier investment than the potential entrant the smaller investment scale protects the incumbent s assets in place which offsets the incumbent s cost disadvantage from investing in smaller steps than the entrant would choose nevertheless the threat of entry constrains the incumbent s investment behavior and limits its profitability the model is solved using a combination of best response iteration and the projected successive over relaxation method

optimal forest rotation and land values under a borrowing constraint abstract this study relaxes the assumption of perfect capital markets in the classical faustmann forest rotation model a constraint on borrowing changes all the basic properties of optimal forest harvesting instead of a constant rotation period an infinite chain of rotations is determined by a nonlinear difference equation the rotation period evolves over time and approaches a stationary rotation in finite or infinite time the length of optimal rotation timber supply and the value of forest land depend on forest owner specific factors that are normally nonexistent in rotation problems the model explains several empirical findings that cause problems for the classical versions of the faustmann model

the valuation of forestry resources under stochastic prices and inventories a contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers strategic reactions to changing conditions are impor tant as an example of such a case we solve the classical problem of the duration of an investment in forestry resources i e when to cut down the trees in the general case of stochastic output prices and stochastic natural growth rate and timber inventories a con tingent claims approach is used to value the forestry resources as a function of 1 sto chastic prices and inventories and 2 an asymmetric optimal production policy that incorporates the option to halt timber production temporarily i introduction classical capital budgeting techniques are based on the assumption that fu ture cash flows follow a rigid pattern and can be accurately predicted far into the future on the basis of such cash flow predictions the project is either accepted or rejected the uncertainty in the project and management s strategic reactions to changing conditions are dealt with only superficially at best a risk adjusted interest rate is employed and various deterministic scenarios are plotted out in situations where uncertainty and management s strategic reactions to it are im portant the classical technique is apt to lead to wrong decisions the technology needed to deal with such problems more accurately is becoming available the purpose of this paper is to present a stylized example of how it can be used our example is a general solution to the classical duration problem of the optimal control of a long term renewable resource investment such as forestry resources i e when to chop down a tree 1 if the prices and the natural growth rate of the inventory of forest timber are assumed to be deterministic the optimal control is very simple to derive but when both the price and inventory of timber are stochastic the problem becomes both stochastic and asymmetric the asym

excess capacity a permanent characteristic of us airlines this paper examines the permanence of excess capacity in the us airline industry to avoid the problems with the standard engineering measure of capacity utilization load factor we define and measure capacity as an economic concept two measures of economic capacity utilization are then computed one a demand based measure and the other an output based measure of capacity utilization both measures share little in common with the standard engineering measure load factor and reveal some interesting attributes of airline travel demand this paper also provides interesting new insights into the role of deregulation and the costs of excess capacity during regulation specifically it is found that deregulation with the concomitant rationalization of route structures enabled airlines to move closer to their optimal levels of capacity and facilitated substantial improvements in capacity utilization and cost reductions over the period considered 1998 john wiley sons ltd

an investigation of the harvest decision of timber firms in the south east united states in the forestry literature stochastic extensions of the classic faustmann model have become the predominant models of optimal harvesting on even aged timber stands a recent attempt to estimate a stochastic version of the faustmann model left several puzzling results unexplained provencher 1995 this paper reports on new estimation and analyses undertaken to resolve these puzzles of particular note is the result that the value of using correct price forecasts in the harvest decision is much lower than indicated by recent simulation studies perhaps because variability in convenience yield dampens the expected gain from exploiting stochastic variation in timber prices

harvesting a renewable resource under uncertainty abstract this paper presents a theory of harvesting that allows for partial harvests and accounts for the risk of extinction for biological assets with size dependent stochastic growth the harvesting decision is formulated as a disinvestment problem in continuous time and generalized faustmann formulas are derived the probability of extinction is then analyzed for a wide class of growth functions an illustration based on the logistic brownian motion shows that both optimal biomass at harvest and harvest size do not vary monotonically with uncertainty more generally this paper illustrates the importance of properly accounting for barriers in stochastic investment problems

the spillover effects of biofuel policy on participation in the conservation reserve program abstract this paper studies the spillover effects of rising biofuel production on participation in the conservation reserve program landowner participation decisions are modeled using a real options framework we develop a land use decision model that captures biofuel driven structural changes in market demand and derive threshold conditions that trigger participation in the program we then quantify the impacts of biofuel production on participation at both the national and state levels using monte carlo simulations the model is also used to analyze how changes in the persistence of the biofuel production boom and in the volatility of farming returns affect conservation participation decisions policy implications of the results are discussed

permanent and temporary policy incentives for conservation under stochastic returns from competing land uses rapid conversion of private land for agricultural and urban use has raised concern worldwide over the loss of ecological services to inform conservation policy we model privately optimal land use decisions using a real options framework that assumes both the ecological and commercial values of land are stochastic and that land conversion is irreversible we analyze permanent and temporary land conservation policy incentives using this dynamic framework to guide policy makers interested in designing efficient payment mechanisms to achieve ecological preservation goals we find that while the financial cost of temporary policy incentives is generally much lower than permanent policy incentives this difference is very small in scenarios with high discount rates and lower uncertainties in conversion returns and lower expected trend in conservation returns alternately the financial cost of temporary conservation is substantially lower than that of permanent conservation when the expected trend in conservation returns and uncertainties in conservation and conversion returns is high and the discount rate is low comparison with net present value and single source uncertainty models indicates that the presence of a second uncertainty increases the option value of delaying conversion and shows that permanent and temporary policy incentives based on either of the two simpler models can be seriously misguided if multiple uncertainties are present we illustrate the analytical results with a case study of tropical deforestation in indonesia where private landowners can either conserve forests and earn carbon credits or convert to palm oil agriculture and earn profits from the sale of palm oil

the stochastic rotation problem a generalization of faustmann s formula to stochastic forest growth abstract in the present paper we study the optimal cutting strategy 1 2 for an ongoing forest by using stochastic impulse control we show how faustmann s formula can be generalized to stochastic growing forests the paper extends and clarifies previous studies by miller and voltaire 1983 clarke and reed 1989 and reed and clarke 1990

factor substitution and procurement competition for forest resources in sweden the utilisation of forest resources in the energy sector has been increasing partly caused by economic policies introduced to reduce the emission of greenhouse gases this in turn has led to an in

on the elasticities of harvesting rules abstract in this paper we rank the relative importance of the exogenous parameters upon the optimal harvesting size in a stochastic rotation problem we show that when the tree growth follows geometric brownian motion the harvesting size is most elastic to the harvesting cost followed by the interest rate and is least elastic to the parameters of tree growth similar ranking holds for the linear growth case in both cases the harvesting size is increasing and concave in the harvesting cost bounded between two parallel lines the harvesting decision is made according to a stochastic extension of the faustmann formula

harvesting in a fishery with stochastic growth and a mean reverting price we analyze a continuous nonlinear bioeconomic model to demonstrate how stochasticity in the growth of fish stocks affects the optimal exploitation policy when prices are stochastic mean reverting and possibly harvest dependent optimal exploitation has nonlinear responses to the price signal and should be conservative at low levels of biological stochasticity and aggressive at high levels price stochasticity induces conservative exploitation with little or no biological uncertainty but has no strong effect when the biological uncertainty is larger we further observe that resource exploitation should be conservative when the price reverts slowly to the mean simulations show that in the long run both the stock level and the exploitation rate are lower than in the deterministic solution with a harvest dependent price the long run price is higher in the stochastic system the price mean reversion rate has no influence on the long run solutions

optimal investment in ecological rehabilitation under climate change ecological rehabilitation is subject to a variety of risks affecting the likely return on investment we propose an options approach to allocating scarce conservation funds that explicitly allows for the irreversibility of investment and risks to investment payoffs the approach captures ecosystem dynamics from extinction debt as well as ecological and climatic risks at the project scale climatic risks are introduced through three channels the effects of climate change on species loss future rehabilitation benefits and frequency of catastrophic events our results suggest that allocating voluntary rehabilitation contracts on the basis of real options criteria increases cost efficiency and delivers greater value for money for the government when compared with the conventional cost effectiveness criterion as it is illustrated for the case of box gum grassy woodland rehabilitation in australia

harvest decisions and asset valuation for biological resources exhibiting size dependent stochastic growth optimal harvest rules and preharvest valuation procedures are derived for biological assets with stochastic size dependent growth in a stochastic price environment these issues are analyzed as continuous time optimal stopping problems both the single rotation and ongoing rotations problems are addressed the sensitivity of harvest and valuation rules is assessed the results are compared with those derived from a myopic look ahead procedure and with the corresponding findings for age dependent growth copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

what a difference a stochastic process makes epidemiological based real options models of optimal treatment of disease the real options approach has been used within environmental economics to investigate the impact of uncertainty on the optimal timing of control measures to minimise the impacts of invasive species including pests and diseases previous studies typically model the growth in infected area using geometric brownian motion gbm the advantage of this simple approach is that it allows for closed form solutions however such a process does not capture the mechanisms underlying the spread of infection in particular the gbm assumption does not respect the natural upper boundary of the system which is determined by the maximum size of the host species nor the deceleration in the rate of infection as this boundary is approached we show how the stochastic process describing the growth in infected area can be derived from the characteristics of the spread of infection if the model used does not appropriately capture uncertainty in infection dynamics then the excessive delay before treatment implies that the full value of the option to treat is not realised indeed when uncertainty is high or the disease is fast spreading ignoring the mechanisms of infection spread can lead to control never being deployed thus the results presented here have important implications for the way in which the real options approach is applied to determine optimal timing of disease control given uncertainty in future disease progression

rural land use traditional agriculture or forestry the signing of the kyoto protocol and the official recognition of forestry s capacity to sequester carbon has prompted considerable interest within the european union in forestry as a competing land use application however despite large increases in grants to forestry afforestation rates in certain eu countries are below national targets in this paper we employ a real options model to theoretically explain why farmers may be slow to switch land from traditional agriculture to forestry the theoretical model is then used to motivate an empirical dynamic panel data model and both models are applied to irish data

a comparison of the ito and stratonovich formulations of problems in finance abstract a comparison of and the relationship between the ito and stratonovich formulations of stochastic integration is given it is argued that generally the ito formulation is appropriate for problems of finance and economics the black scholes option pricing problem is discussed in both frameworks with the ito formulation being shown to be clearly superior a finance example in which the stratonovich approach is simplest is also presented

optimal forest rotation when stumpage prices follow a diffusion process a key assumption in the faustmann rule for financial maturity is that stumpage prices are constant over time timber price series however exhibit wide fluctuations over time which this paper models as a lognormal diffusion process comparing the diffusion results modeled here to the fixed price faustmann results show 1 the prescribed rotation length is generally longer 2 computed stand values are higher using the diffusion model with the greatest divergence occurring when a stand is about the midpoint of a rotation 3 as the stumpage price volatility increases the gain in computed npv increases though in a nonlinear fashion

thinning and harvesting in stochastic forest models abstract this paper analyzes a stochastic forest growth model in which the manager is able to first thin the forest to promote better growth before harvesting both wicksell single thinning and harvesting cycle and faustmann on going rotation problems are considered the wicksell problem is analyzed by first restricting the class of decision times to thinning harvesting pairs that bound the growth away from infinity and imbedding the problem in an infinite dimensional linear program on a space of triplets of measures these measures capture the thinning and harvesting decisions along with the behavior of the growth process prior to harvest an auxiliary linear program then leads to a nonlinear optimization problem for which an optimal value and solution are determined the values of all the problems are be related through a set of inequalities the solution of the nonlinear problem determines random thinning and harvesting times for the single thinning and harvesting cycle which demonstrate the equality of the values of these various problems finally for the wicksell problem the unrestricted class of thinning and harvest times is shown to give the same value as the restricted class the faustmann on going thinning and harvesting rotation problem is reduced to a wicksell problem which then allows for the characterization of the value as the solution to a different nonlinear optimization problem the effects of the opportunity to thin the forest are illustrated on a mean reverting stochastic model

using the binomial model for the valuation of real options in computing optimal subsidies for chinese renewable energy investments abstract for the valuation and implementation of renewable energy investments the issue of providing private investors with a financial incentive to accelerate their investment is frequently a critical component we apply this principle to the chinese context this paper focuses on using the binomial model to compute the required subsidy that would incentivize investors to optimal immediate exercise of the american style option embedded at the launching phase of the projects for chinese renewable energy investments in addition this paper also aims at contrasting the binomial model with the more laborious monte carlo simulation previously used to evaluate the proper subsidy by using the same data but a different method and reducing the number of uncertain factors to one it is suggested these two methods have similar outcomes but the binomial method requires substantially less computation and is more self explanatory this paper thus provides government with an easy to implement alternative way to compute the required subsidy

optimal feed in tariff for solar photovoltaic power generation in china a real options analysis abstract the feed in tariff policy is widely used to promote the development of renewable energy china also adopts feed in tariff policy to attract greater investment in solar photovoltaic power generation this study employs real options method to assess the optimal levels of feed in tariffs in 30 provinces of china the uncertainties in co 2 price and investment cost are considered a method that integrates the backward dynamic programming algorithm and least squares monte carlo method is used to solve the model the results demonstrate that the feed in tariffs of 30 provinces range from 0 68 rmb kwh to 1 71 rmb kwh and the average level is 1 01 rmb kwh on this basis we find that the levels of sub regional feed in tariff announced in 2013 are no longer appropriate and should be adjusted as soon as possible we have also identified the implications of technological progress and carbon emission trading schemes as well as the importance of strengthening electricity transmission it has been suggested that the chinese government takes diverse measures including increasing research and development investment establishing and improving a nationwide carbon emission trading scheme and accelerating the construction of electricity transmission infrastructure to reduce the required feed in tariff and promote the development of solar photovoltaic power generation

harvesting and recovery decisions under uncertainty abstract a stochastic forest rotation model in the faustmann tradition is presented and exemplified the model combines harvesting decisions with the potential to recover or clean up to restore the land after very unfavorable evolutions of the stochastic growth process uncertainty is shown to have a generally ambiguous effect on the optimal choice of investment strategy it is also shown how such models can be related to theory of optimal inventory control

structural estimation of the stochastic dynamic decision problems of resource users an application to the timber harvest decision abstract this paper examines a method for structural estimation of the stochastic dynamic decision problems of resource users the method involves nesting a stochastic dynamic programming algorithm within a maximum likelihood routine an application to the timber harvest decision indicates that owners of slash pine plantations in southeast georgia use a low discount rate and treat timber price as a random walk moreover the harvest decision is apparently dominated by profit shocks overlooked in the usual models of the harvest decision

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

the decision to conserve or harvest old growth forest abstract the decision to harvest or conserve old growth forest is formulated as a stochastic decision problem in continuous time uncertainty in future amenity values for standing forest and in future timber revenues for harvested forest are included in the model along with the risk of catastrophic destruction by fire pest infestation etc it is shown how the decision problem can be expressed as an optimal stopping problem which can be solved analytically the optimal decision rule is shown to depend on how the ratio of current timber value to the current expected present value of amenity benefits foregone through harvesting compares with some critical level the effects of changes in uncertainty and other parameters on the optimal rule are discussed also it is shown how the cost benefit analysis and certainty equivalence procedures lead to premature harvesting and the expected loss in survival time for these sub optimal procedures is calculated

measure twice cut once optimal inventory and harvest under volume uncertainty and stochastic price dynamics abstract natural resources are often subject to state uncertainty resource abundance is not known with certainty but can be measured measurements are typically imperfect and costly to obtain the decision of whether to invest in resource measurement may be influenced by other state variables for example a resource commodity price we introduce a mixed observability model of optimal forest management featuring a partially observable forest resource and perfectly observable stochastic price the decision maker optimizes the expected net present value of forest returns by choosing when to measure current forest volume conduct an inventory harvest and replant or delay action parameter values are obtained from numerous forestry data sources optimal investment in inventory reduces the cost of uncertainty about timber volume and increases the predictability of returns moreover price stochasticity interacts with inventory decisions to produce asymmetric effects of high and low prices on inventory timing we also produce the first graphical faustmann rule analogues for jointly optimal inventory and harvest

the impact of spatial price differences on oil sands investments abstract in this article a two factor real options model is developed to examine the impact spatial price differences have on the value of an oil sands project and the incentive to invest large volatile price differences between locations can emerge when demand to ship exceeds capacity limits this may have a significant impact on production investment and policy in exporting regions here we assume the price difference between two locations follows a stationary process implying crude oil markets are integrated as oil prices in different locations move together the investment decision is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method results show the value of an oil sands project and the incentive to invest in a new project will increase when the mean price difference decreases surprisingly the standard deviation of the price difference has very little impact on project value or the incentive to invest